Laura Alfaro, Nick Bloom, Paola Conconi, Harald Fadinger, Patrick Legros, Andrew Newman, Rafaella Sadun, John Van Reenen
Journal of the European Economic Association, May 2023, jvad027
Publication year: 2023

Abstract: We jointly study firm boundaries and the allocation of decision rights within them by confronting an incomplete-contracts model with data on vertical integration and delegation for thousands of firms around the world. Integration has an option value: it confers authority to delegate or centralize decision rights, depending on who can best solve problems that arise in the course of an uncertain production process. In line with the model’s predictions, we find that firms are more likely to integrate suppliers that produce more valuable inputs and operate in industries with more dispersed productivity and that firms delegate more decisions to integrated suppliers that produce more valuable inputs and operate in more productive industries.

JEL classification: D2, L2.

Keywords: Integration, delegation, uncertainty, real options, supply assurance.

Come Together


Download the PDF file .