Asset Specificity and Vertical Integration: Williamson's Hypothesis Reconsidered

35 Pages Posted: 9 Apr 2009

See all articles by Christian A. Ruzzier

Christian A. Ruzzier

University of San Andres (UMSA) - Department of Economics

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

Ruzzier, Christian A., Asset Specificity and Vertical Integration: Williamson's Hypothesis Reconsidered (April 3, 2009). Harvard Business School Working Paper No. 09-119, Available at SSRN: https://ssrn.com/abstract=1374687 or http://dx.doi.org/10.2139/ssrn.1374687

Christian A. Ruzzier (Contact Author)

University of San Andres (UMSA) - Department of Economics ( email )

Vito Dumas 284
B1644BID Victoria, Buenos Aires
Argentina

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