Asset Specificity and Vertical Integration: Williamson's Hypothesis Reconsidered
35 Pages Posted: 9 Apr 2009
Date Written: April 3, 2009
Abstract
A point repeatedly stressed by transaction cost economics is that the more specific the asset, the more likely is vertical integration to be optimal. In spite of the profusion of empirical papers supporting this prediction, recent surveys and casual observation suggest that higher levels of asset specificity need not always lead to vertical integration. The purpose of this paper is to uncover some of the factors driving firms to (sometimes) choose to remain separated, rather than integrate, in the presence of high specificity. Its main economic message is that in a world where outside options matter and investments are multidimensional, high levels of asset specificity can foster nonintegration: a low level of specificity provides the most misdirected incentives when transacting in a market (because the outside option of external trade becomes so tempting), thus making a stronger case for nonintegration when specificity is high.
Keywords: relational contracts, asset specificity, property rights, vertical integration, outsourcing
JEL Classification: L14, D23, L24
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Markets in Intangibles: Patent Licensing
By Feng Gu and Baruch Lev
-
Markets in Intangibles: Patent Licensing
By Feng Gu and Baruch Lev
-
Intangibles Disclosure Information on Internet by Multinational Corporations
-
Residual Income Claimancy, Monitoring, and the R&D Firm: Theory with Application to Biotechs
By John E. Garen and Koyin Chang
-
Competitive Advantage Valuation of Intellectual Property Assets: A New Tool for Ip Managers
By Ted Hagelin
-
Valuing Patents for Licensing: A Practical Survey of the Literature
By Anne Layne-farrar and Josh Lerner
-
The Value of Certainty in Intellectual Property Rights: Stock Market Reactions to Patent Litigation.