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From Flexibility to Insecurity: How Vertical Separation Amplifies Firm-level Uncertainty

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  • David Thesmar
  • Mathias Thoenig

Abstract

This article presents a model where firms may endogenously externalize part of their production process. We start from the premise that adaptation to uncertainty cannot be contracted upon in the worker/employer relationship. Vertical separation then balances flexibility gains against hold-up costs of opportunistic behavior by outside contractors. In equilibrium, the degree of separation is shown to depend on the degree of product market competition, contractor's bargaining power, and the volatility of demand shocks. Our main result is that an increase in the degree of vertical separation amplifies the elasticity to demand shocks of firms' sales and employment. It does not, however, amplify aggregate uncertainty. Evidence from firm-level data is shown to be largely consistent with the main implications of our theory. (JEL: L16, L23, L24) (c) 2007 by the European Economic Association.

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Bibliographic Info

Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 5 (2007)
Issue (Month): 6 (December)
Pages: 1161-1202

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Handle: RePEc:tpr:jeurec:v:5:y:2007:i:6:p:1161-1202

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Cited by:
  1. Kjell Erik Lommerud & Frode Meland & Odd Rune Straume, 2005. "Can Deunionization Lead to International Outsourcing?," CESifo Working Paper Series 1545, CESifo Group Munich.
  2. Pierre M. Picard & David E. Wildasin, 2009. "Labor Market Pooling, Outsourcing and Labor Contracts," CREA Discussion Paper Series 09-05, Center for Research in Economic Analysis, University of Luxembourg.
  3. Noriaki Matsushima & Tomomichi Mizuno, 2009. "Vertical Separation as a Defense against Strong Suppliers," ISER Discussion Paper 0755, Institute of Social and Economic Research, Osaka University.
  4. Nick Bloom & John Van Reenen, 2010. "Human resource management and productivity," LSE Research Online Documents on Economics 28730, London School of Economics and Political Science, LSE Library.
  5. Alexander Hijzen & Paul Swaim, . "Offshoring, Labour Market Institutions and the Elasticity of Labour Demand," Discussion Papers 08/05, University of Nottingham, GEP.
  6. PICARD, Pierre M. & WILDASIN, David E., . "Outsourcing, labor market pooling, and labor contracts," CORE Discussion Papers RP -2354, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. David Thesmar & Mathias Thoenig, 2011. "Contrasting Trends in Firm Volatility," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 143-80, October.

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