Vertical Integration and Technology: Theory and Evidence

48 Pages Posted: 15 Aug 2007 Last revised: 26 Feb 2015

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Rachel Griffith

Institute for Fiscal Studies (IFS); University of Manchester; Centre for Economic Policy Research (CEPR)

Fabrizio Zilibotti

University of Zurich; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2004

Abstract

This paper investigates the determinants of vertical integration using data from the UK manufacturing sector. We find that the relationship between a downstream (producer) industry and an upstream (supplier) industry is more likely to be vertically integrated when the producing industry is more technology intensive and the supplying industry is less technology intensive. Moreover, both of 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. They are consistent with the incomplete contract theories of the firm that emphasize both the potential costs and benefits of vertical integration in terms of investment incentives.

Suggested Citation

Acemoglu, Daron and Aghion, Philippe and Griffith, Rachel and Zilibotti, Fabrizio, Vertical Integration and Technology: Theory and Evidence (December 2004). NBER Working Paper No. w10997. Available at SSRN: https://ssrn.com/abstract=657268

Daron Acemoglu (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Philippe Aghion

College de France and London School of Economics and Political Science, Fellow ( email )

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National Bureau of Economic Research (NBER)

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Rachel Griffith

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Centre for Economic Policy Research (CEPR)

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Fabrizio Zilibotti

University of Zurich ( email )

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

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