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Why Do Firms Own Production Chains?

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  • Ali Hortacsu
  • Chad Syverson

Abstract

Many firms own links of production chains--i.e., they own both upstream and downstream plants in vertically linked industries. We use broad-based yet detailed data from the economy’s goods-producing sectors to investigate the reasons for such vertical ownership. It does not appear that vertical ownership is usually used to facilitate transfers of goods along the production chain, as is often presumed. Shipments from firms’ upstream units to their downstream units are surprisingly low, relative to both the firms’ total upstream production and their downstream needs. Roughly one-third of upstream plants report no shipments to their firms’ downstream units. Half ship less than three percent of their output internally. We do find that manufacturing plants in vertical ownership structures have high measures of “type” (productivity, size, and capital intensity). These patterns primarily reflect selective sorting of high plant types into large firms; once we account for firm size, vertical structure per se matters much less. We propose an alternative explanation for vertical ownership that is consistent with these results. Namely, that rather than moderating goods transfers down production chains, it instead allows more efficient transfers of intangible inputs (e.g., managerial oversight) within the firm. We document some suggestive evidence of this mechanism.

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File URL: ftp://ftp2.census.gov/ces/wp/2009/CES-WP-09-31.pdf
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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 09-31.

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Length: 50 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:cen:wpaper:09-31

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  1. Ali Hortaçsu & Chad Syverson, 2007. "Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices," Journal of Political Economy, University of Chicago Press, vol. 115, pages 250-301.
  2. Andrea L. Eisfeldt & Adriano A. Rampini, 2009. "Leasing, Ability to Repossess, and Debt Capacity," Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1621-1657, April.
  3. Chad Syverson, 2003. "Product Substitutability and Productivity Dispersion," NBER Working Papers 10049, National Bureau of Economic Research, Inc.
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  17. Teece, David J., 1982. "Towards an economic theory of the multiproduct firm," Journal of Economic Behavior & Organization, Elsevier, vol. 3(1), pages 39-63, March.
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