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Incomplete Contracts and Industrial Organization

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  • Gene M. Grossman
  • Elhanan Helpman

Abstract

We develop an equilibrium model of industrial structure in which the organization of firms is endogenous. Differentiated consumer products can be produced either by vertically integrated firms or by pairs of specialized companies. Production of each variety of consumer good requires a unique, specialized component. Vertically integrated firms can manufacture the components they need in the quantity and type that maximizes profits, but they face a relatively high cost of governance. Specialized firms can produce at lower cost, but input suppliers face a potential hold-up problem. We study the equilibrium mode of organization when inputs are fully or partially specialized. We consider how the degree of competition in the market and other parameters affect the equilibrium choices, and how the equilibrium compares with the efficient allocation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7303.

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Date of creation: Aug 1999
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Handle: RePEc:nbr:nberwo:7303

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  1. Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
  2. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  3. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-82, March.
  4. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  5. Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 83-114, January.
  6. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
  7. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," NBER Working Papers 6726, National Bureau of Economic Research, Inc.
  8. Segal, Ilya, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 57-82, January.
  9. Jose Campa & Linda S. Goldberg, 1997. "The Evolving External Orientation of Manufacturing Industries: Evidence from Four Countries," NBER Working Papers 5919, National Bureau of Economic Research, Inc.
  10. Riordan, Michael H. & Williamson, Oliver E., 1985. "Asset specificity and economic organization," International Journal of Industrial Organization, Elsevier, vol. 3(4), pages 365-378, December.
  11. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  12. Katharine G. Abraham & Susan K. Taylor, 1993. "Firms' Use of Outside Contractors: Theory and Evidence," NBER Working Papers 4468, National Bureau of Economic Research, Inc.
  13. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  14. Yeats, Alexander J., 1998. "Just how big is global production sharing?," Policy Research Working Paper Series 1871, The World Bank.
  15. David Hummels & Dana Rapoport & Kei-Mu Yi, 1998. "Vertical specialization and the changing nature of world trade," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 79-99.
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Cited by:
  1. Shy, Oz & Stenbacka, Rune, 2003. "Strategic outsourcing," Journal of Economic Behavior & Organization, Elsevier, vol. 50(2), pages 203-224, February.
  2. Yijiang Wang, . "Product Market Conditions and Job Design," Working Papers 0402, Human Resources and Labor Studies, University of Minnesota (Twin Cities Campus).
  3. Turrini, Alessandro Antonio & Urban, Dieter M, 2001. "For Whom is MAI? A Theoretical Perspective on Multilateral Agreements on Investment," CEPR Discussion Papers 2774, C.E.P.R. Discussion Papers.
  4. Rodriguez-Palenzuela, Diego, 2001. "Sources of economic renewal: from the traditional firm to the knowledge firm," Working Paper Series 0043, European Central Bank.
  5. Valeria Gattai, 2005. "From the Theory of the Firm to FDI and Internalisation: A Survey," Working Papers 2005.51, Fondazione Eni Enrico Mattei.
  6. Walter Elberfeld & Georg Götz, 2002. "Market Size, Technology Choice, and Market Structure," German Economic Review, Verein für Socialpolitik, vol. 3(1), pages 25-41, 02.

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