Working Paper: NBER ID: w24603
Authors: Laura Alfaro; Nicholas Bloom; Paola Conconi; Harald Fadinger; Patrick Legros; Andrew Newman; Raffaella Sadun; John Van Reenen
Abstract: We develop an incomplete-contracts model to jointly study firm boundaries and the al-location of decision rights within them. Integration has an option value: it gives firm owners authority to delegate or centralize decision rights, depending on who can best solve problems that may arise in the course of course of an uncertain production process. To examine the evidence, we construct measures of vertical integration and delegation for thousands of firms in different countries and industries. In line with the model’s pre-dictions, we find that input value and supplier uncertainty play a key role in shaping both integration and delegation choices.
Keywords: vertical integration; delegation; firm boundaries; decision rights
JEL Codes: D2; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| input value (D46) | integration (F15) |
| input value (D46) | delegation (M54) |
| integration (F15) | delegation (M54) |