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Asset Specificity and Vertical Integration: Williamson’s Hypothesis Reconsidered

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Author Info
Christian A. Ruzzier () (Harvard Business School)

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Abstract

A point repeatedly stressed by transaction cost economics is that the more specific the asset, the more likely is vertical integration to be optimal. In spite of the profusion of empirical papers supporting this prediction, recent surveys and casual observation suggest that higher levels of asset specificity need not always lead to vertical integration. The purpose of this paper is to uncover some of the factors driving firms to (sometimes) choose to remain separated, rather than integrate, in the presence of high specificity. Its main economic message is that in a world where outside options matter and investments are multidimensional, high levels of asset specificity can foster nonintegration: a low level of specificity provides the most misdirected incentives when transacting in a market (because the outside option of external trade becomes so tempting), thus making a stronger case for nonintegration when specificity is high.

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Publisher Info
Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 09-119.

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Length: 35 pages
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:hbs:wpaper:09-119

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Related research
Keywords: relational contracts; asset specificity; property rights; vertical integration; outsourcing;

Find related papers by JEL classification:
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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