Working Paper: CEPR ID: DP3565
Authors: Daron Acemoglu; Philippe Aghion; Fabrizio Zilibotti
Abstract: We construct a model where the equilibrium organization of firms changes as an economy approaches the world technology frontier. In vertically integrated firms, owners (managers) have to spend time both on production and innovation activities, and this creates managerial overload, and discourages innovation. Outsourcing of some production activities mitigates the managerial overload, but creates a holdup problem, causing some of the rents of the owners to be dissipated to the supplier. Far from the technology frontier, imitation activities are more important, and vertical integration is preferred. Closer to the frontier, the value of innovation increases, encouraging outsourcing.
Keywords: contracts; economic growth; internal organization of the firm; vertical integration
JEL Codes: L16; L22; O31; O33; O38; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Distance to technology frontier (O49) | Vertical Integration (L22) |
| Distance to technology frontier (O49) | Outsourcing (L24) |
| Vertical Integration (L22) | Managerial Overload (M54) |
| Managerial Overload (M54) | Innovation (O35) |
| Outsourcing (L24) | Innovation (O35) |
| Innovation (O35) | Growth Rates (O49) |
| Distance to technology frontier (O49) | Nonconvergence Trap (D59) |