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Divided we Stand, United we Fall: Asset Specificity and Vertical Integration Reconsidered

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  • Christian A. Ruzzier

Abstract

Recent surveys and casual observation suggest that higher levels of asset specificity need not always lead to vertical integration, as traditionally stressed by transaction-cost economics. This paper uncovers some of the factors driving firms to (sometimes) choose to remain separated in the presence of high specificity. It shows that in a world where outside options matter and investments are multidimensional, high 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.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 168 (2012)
Issue (Month): 4 (December)
Pages: 658-686

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201212)168:4_658:dwsuwf_2.0.tx_2-0

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