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Vertical Integration and Distance to Frontier

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  • Daron Acemoglu
  • Philippe Aghion
  • Fabrizio Zilibotti

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9191.

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Date of creation: Sep 2002
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Publication status: published as Daron Acemoglu & Philippe Aghion & Fabrizio Zilibotti, 2003. "Vertical Integration and Distance to Frontier," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 630-638, 04/05.
Handle: RePEc:nbr:nberwo:9191

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  1. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
  2. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Patrick Francois & Joanne Roberts, 2000. "Contracting Productivity Growth," Working Papers, University of Toronto, Department of Economics jorob-99-02, University of Toronto, Department of Economics.
  4. Martimort, D. & Verdier, T., 1999. "Monopolies Life Cycle, Bureaucratization and Schumpeterian Growth," Papers, Laval - Laboratoire Econometrie 1999-09, Laval - Laboratoire Econometrie.
  5. Acemoglu, Daron & Zilibotti, Fabrizio, 1999. " Information Accumulation in Development," Journal of Economic Growth, Springer, Springer, vol. 4(1), pages 5-38, March.
  6. Daron Acemoglu & Philippe Aghion & Fabrizio Zilibotti, 2002. "Distance to Frontier, Selection, and Economic Growth," NBER Working Papers 9066, National Bureau of Economic Research, Inc.
  7. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 85-120, February.
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