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.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 5 (2007) Issue (Month): 6 (December) Pages: 1161-1202 Download reference. The following formats are available: HTML
(with abstract),
plain text
(with abstract),
BibTeX,
RIS (EndNote, RefMan, ProCite),
ReDIF
For technical questions regarding this item, or to correct its listing, contact: (Christopher F. Baum).
Related research
Keywords:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)