Working Paper: CEPR ID: DP5258
Authors: Daron Acemoglu; Philippe Aghion; Rachel Griffith; Fabrizio Zilibotti
Abstract: This paper investigates the determinants of vertical integration. We first derive a number of predictions regarding the relationship between technology intensity and vertical integration from a simple incomplete contracts model. Then, we investigate these predictions using plant-level data for the UK manufacturing sector. Most importantly, and consistent with theory, we find that the technology intensities of downstream (producer) and upstream (supplier) industries have opposite effects on the likelihood of vertical integration. Also consistent with theory, both these effects are stronger when the supplying industry accounts for a large fraction of the producer's costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation strategies, and with or without controlling for a number of firm and industry-level characteristics.
Keywords: holdup; incomplete contracts; internal organisation of the firm; investment; R&D; residual rights of control; technology; UK manufacturing; vertical integration
JEL Codes: L22; L23; L24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| technology intensity of producing industry (L63) | vertical integration (L22) |
| technology intensity of supplying industry (L63) | vertical integration (L22) |
| larger share of supplier costs (D16) | increase in effect of technology intensity of supplying industry on vertical integration (O14) |