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Contractual Institutions, Financial Development and Vertical Integration: Theory and Evidence

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  • Rocco Macchiavello

Abstract

This paper presents an industry equilibrium model of vertical integration under contractual imperfections with specific input suppliers and external investors.� I assume that vertical integration economizes on the needs for contracts with specific input suppliers at the cost of higher fixed costs.� I show that contractual frictions with external investors affect vertical integration through two opposing channels whose relative intensities depend on other determinants of firms size distribution in the industry.� Using cross-country-industry data, I present novel evidence on the institutional determinants of international differences in vertical integration which is consistent with the predictions of the theoretical model.� In particular, I show that countries with more developed financial systems are relatively more vertically integrated in industries that employ a high share of workers in large firms.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 392.

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Date of creation: 01 Apr 2008
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Handle: RePEc:oxf:wpaper:392

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Keywords: Vertical Integration; Credit Constraints; Contract Enforcement; Developing Countries; Industry; Equilibrium;

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Cited by:
  1. Macchiavello, Rocco, 2010. "Vertical integration and investor protection in developing countries," Journal of Development Economics, Elsevier, vol. 93(2), pages 162-172, November.
  2. Johan F.M. Swinnen & Anneleen Vandeplas, 2007. "Vertical coordination, rent distribution, and development," LICOS Discussion Papers 18407, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  3. Rocco Macchiavello, 2007. "Vertical Integration, Missing Middle and Investor Protection in Developing Countries," Economics Series Working Papers 373, University of Oxford, Department of Economics.
  4. Luigi Pascali, 2009. "Contract Incompleteness, Globalization and Vertical Structure: an Empirical Analysis," Boston College Working Papers in Economics 727, Boston College Department of Economics.
  5. Macchiavello, Rocco, 2007. "Financial Constraints and the Costs and Benefits of Vertical Integration," CEPR Discussion Papers 6104, C.E.P.R. Discussion Papers.

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