Working Paper: CEPR ID: DP9004
Authors: Patrick Legros; Andrew Newman
Abstract: We present a perfectly-competitive model of firm boundary decisions and study their interplay with product demand, technology, and welfare. Integration is pri- vately costly but is effective at coordinating production decisions; non-integration is less costly, but coordinates relatively poorly. Output price influences the choice of ownership structure: integration increases with the price level. At the same time, own- ership affects output, since integration is more productive than non-integration. For a generic set of demand functions, the result is heterogeneity of ownership and perfor- mance among ex-ante identical enterprises. The price mechanism transmutes demand shifts into industry-wide re-organizations and generates external effects from techno- logical shocks: productivity changes in some firms may induce ownership changes in others. If the enterprise managers have full title to its revenues, market equilibrium ownership structures are second-best efficient. When managers have less than full revenue claims, equilibrium can be inefficient, with too little integration.
Keywords: decision rights; incomplete contracting; industrial organization; integration; ownership
JEL Codes: D2; D4; L1; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| output price (L11) | ownership structure (G32) |
| ownership structure (G32) | output levels (E23) |
| ownership efficiency (R21) | overall welfare (I31) |
| external technological changes (O36) | organizational decisions (L20) |
| market prices increase (E30) | likelihood of integration (F15) |