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Production Technology, Information Technology, and Vertical Integration under Asymmetric Information

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  • Gamal Atallah

Abstract

The paper addresses the effect of technological progress on the frontiers of the firm, building on transaction cost theory and agency theory. The model incorporates four types of costs: production, coordination, management, and transaction costs. The market has lower production costs, but higher coordination costs, than the firm. A principal-two agents framework with adverse selection and moral hazard is adopted. It is found that technological progress in production and information technologies tend to have diametrically opposite effects on procurement. In general, progress in production technology leads to more vertical integration, whereas progress in information technology leads to more subcontracting. When technological change concerns the level of costs, its effect on procurement depends on the cost differential between the firm and the market, and on the relative importance of production and coordination costs; whereas, when technological change affects the effect or disutility of effort, its impact on procurement is unambiguous. The paper provides an explanation for the changing effect of technological progress on procurement throughout the twentieth century: why it favoured vertical integration historically, and why it favours subcontracting (or has a mixed effect) today. This explanation relies on the implication of the evolution of the relative importance of production and coordination activities for the relationship between technological progress and vertical integration. The paper constitutes a bridge between contractual explanations and technological explanations of the existence and frontiers of the firm. Cet article analyse l'effet du changement technologique sur les frontières de la firme en se basant sur la théorie des coûts de transaction et la théorie de l'agence. Le modèle incorpore quatre types de coûts: coûts de production, de coordination, de management et de transaction. Le marché a des coûts de production plus faibles, mais des coûts de coordination plus élevés, que la firme. L'analyse est effectuée dans un cadre principal-deux agents, avec antisélection et risque moral. Les changement technologiques concernant la technologie de production et les technologies de l'information entraînent des effets diamétralement opposés sur l'intégration verticale. En général, le changement technique concernant la technologie de production se traduit par davantage d'intégration verticale, alors que le changement technique concernant les technologies de l'information se traduit par davantage d'impartition. Lorsque le changement technologique concerne le niveau des coûts, son effet sur l'impartition dépend du différentiel de coûts entre la firme et le marché, et de l'importance relative des coûts de production et de coordination; tandis que, lorsque le changement technologique concerne les efforts de réduction des coûts, son effet est sans ambiguïté. Le papier propose une explication du changement dans l'effet du progrès technique sur l'impartition durant le vingtième siècle: pourquoi il a favorisé l'intégration verticale historiquement, et favorise l'impartition (ou du moins a un effet ambigu) aujourd'hui. L'explication repose sur l'impact de l'évolution de l'importance relative des activités de production et de coordination sur la relation entre le progrès technique et l'intégration verticale. Cet article constitue un mariage entre les explications contractuelles et les explications technologiques de l'existence et des frontières de la firme.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2002s-32.

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Date of creation: 01 Apr 2002
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Handle: RePEc:cir:cirwor:2002s-32

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Keywords: Transaction costs; Asymmetric and private information; Markets vs. hierarchies; Vertical integration; Technological change; Information technology; Coûts de transaction; Information privée et asymétrique; Marchés vs. hiérarchies; Intégration verticale; Changement Technologique; Technologies de l'information;

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Cited by:
  1. Hansen, Thorsten, 2010. "Innovation and the International Firm Structure: Theory and Evidence from German Firm-Level Data," Discussion Papers in Economics 11464, University of Munich, Department of Economics.

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