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Asset Specificity and Vertical Integration: Williamson’s Hypothesis Reconsidered

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  • Christian A. Ruzzier

    ()
    (Harvard Business School)

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

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