Working Paper: CEPR ID: DP15970
Authors: Patrick W. Schmitz
Abstract: Consider a buyer and a seller who have agreed to trade an intermediate good. It is ex-post efficient to adapt the good to the prevailing state of the world. The seller has private information about the costs of adapting the good. In the case of non-integration, the buyer has no possibility to verify claims that the seller makes about her costs. In the case of vertical integration, the buyer can verify evidence about the costs that the seller might be able to provide. Even though we assume no further differences between the ownership structures, it turns out that the parties may prefer non-integration.
Keywords: Incomplete Contracts; Make-or-Buy Decision; Property Rights Approach; Private Information; Outsourcing
JEL Codes: D23; D86; D82; L24; M11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ownership structure (vertical integration) (L22) | efficiency of the adaptation process (D61) |
| vertical integration (L22) | ability to verify claims about costs (C82) |
| ability to verify claims about costs (C82) | efficiency of adapting an intermediate good (D61) |
| vertical integration (L22) | mitigate ex post inefficiencies caused by asymmetric information (D82) |
| nonintegration (F02) | higher expected total surplus (D69) |