Vertical Integration and Technology: Theory and Evidence

54 Pages Posted: 2 Nov 2005

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: September 2005

Abstract

This paper investigates the determinants of vertical integration. We first derive a number of predictions regarding the relationship between technology intensity and vertical integration from a simple incomplete contracts model. Then, we investigate these predictions using plant-level data for the UK manufacturing sector. Most importantly, and consistent with theory, we find that the technology intensities of downstream (producer) and upstream (supplier) industries have opposite effects on the likelihood of vertical integration. Also consistent with theory, both 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.

Keywords: Hold-up, incomplete contracts, internal organization of the firm, investment, residual rights of control, R&D, technology, UK manufacturing, vertical integration

JEL Classification: L22, L23, L24

Suggested Citation

Acemoglu, Daron and Aghion, Philippe and Griffith, Rachel and Zilibotti, Fabrizio, Vertical Integration and Technology: Theory and Evidence (September 2005). CEPR Discussion Paper No. 5258. Available at SSRN: https://ssrn.com/abstract=838206

Daron Acemoglu (Contact Author)

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

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Philippe Aghion

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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)

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United Kingdom

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