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Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development

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  • Sharon Novak
  • Scott Stern
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    Abstract

    This paper examines complementarity among vertical integration decisions in automobile product development. Though most research assumes that contracting choices are independent of each other, contracting complementarity arises when the returns to a single vertical integration decision are increasing in the level of vertical integration associated with other contracting choices. First, effective coordination may depend on the level of (non-contractible) effort on the part of each agent; contracting complementarity results if coordination efforts are interdependent and vertical integration facilitates a higher level of non-contractible effort. Second, effective coordination may require the disclosure of proprietary trade secrets, and the potential for expropriation by external suppliers may induce complementarity among vertical integration choices. We provide evidence for complementarity in product development contracting by taking advantage of a detailed dataset that includes the level of vertical integration and the contracting environment for individual automobile systems in the luxury automobile segment. Using an instrumental variables framework that distinguishes complementarity from unobserved firm-level factors, the evidence is consistent with the hypothesis that contracting complementarity is an important driver of vertical integration choices. The findings suggest that contracting complementarity may be particularly important when coordination is important to achieve but difficult to monitor.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13232.

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    Date of creation: Jul 2007
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    Publication status: published as Complementarity among vertical integration decisions: evidence from automobile product development Management Science, Vol. 55, No. 2. (2009), pp. 311-332 by S. Novak, S. Stern posted to automobile complementarity file-import-09-12-23 industry integration outsourcing strategies vertical by whutabarat on 2009-12-23 14:43:53
    Handle: RePEc:nbr:nberwo:13232

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    Cited by:
    1. Evan Rawley & Timothy Simcoe, 2008. "Horizontal Diversification and Vertical Contracting: Firm Scope and Asset Ownership in Taxi Fleets," Working Papers 08-10, Center for Economic Studies, U.S. Census Bureau.
    2. Jeremy T. Fox, 2008. "Estimating Matching Games with Transfers," NBER Working Papers 14382, National Bureau of Economic Research, Inc.
    3. Sharon Novak & Scott Stern, 2007. "How Does Outsourcing Affect Performance Dynamics? Evidence from the Automobile Industry," NBER Working Papers 13235, National Bureau of Economic Research, Inc.

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