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Vertical Integration and Distance to Frontier

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  • Acemoglu, Daron
  • Aghion, Philippe
  • Zilibotti, Fabrizio

Abstract

We construct a model where the equilibrium organization of firms changes as an economy approaches the world technology frontier. In vertically integrated firms, owners (managers) have to spend time both on production and innovation activities, and this creates managerial overload, and discourages innovation. Outsourcing of some production activities mitigates the managerial overload, but creates a holdup problem, causing some of the rents of the owners to be dissipated to the supplier. Far from the technology frontier, imitation activities are more important, and vertical integration is preferred. Closer to the frontier, the value of innovation increases, encouraging outsourcing.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3565.

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Date of creation: Oct 2002
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Handle: RePEc:cpr:ceprdp:3565

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Related research

Keywords: contracts; economic growth; internal organization of the firm; vertical integration;

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  1. Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Acemoglu, Daron & Zilibotti, Fabrizio, 1998. "Information Accumulation in Development," Seminar Papers 652, Stockholm University, Institute for International Economic Studies.
  3. Martimort, David & Verdier, Thierry, 2001. "Monopolies Life Cycle, Bureaucratization, and Schumpeterian Growth," CEPR Discussion Papers 2700, C.E.P.R. Discussion Papers.
  4. Patrick Francois & Joanne Roberts, 2000. "Contracting Productivity Growth," Working Papers jorob-99-02, University of Toronto, Department of Economics.
  5. Zilibotti, Fabrizio & Aghion, Philippe & Acemoglu, Daron, 2006. "Distance to Frontier, Selection, and Economic Growth," Scholarly Articles 4554122, Harvard University Department of Economics.
  6. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
  7. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
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