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Productivity and firm boundaries

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  • Kohler, Wilhelm
  • Smolka, Marcel

Abstract

We use property rights theory to study the effect of productivity on the trade-off between vertical integration and outsourcing at the firm-level. We develop a sharp empirical prediction that is robust across a range of property rights models, holding for single and multiple non-contractible inputs; any fixed cost difference between integration and outsourcing; and regardless of whether production is sequential or simultaneous in nature. Our prediction highlights a hitherto neglected ambiguity of the productivity effect that pushes firms towards integration in headquarter-intensive industries and towards outsourcing in supplier-intensive industries. We find considerable support for this prediction in Spanish firm-level data.

Suggested Citation

  • Kohler, Wilhelm & Smolka, Marcel, 2021. "Productivity and firm boundaries," European Economic Review, Elsevier, vol. 135(C).
    • Handle: RePEc:eee:eecrev:v:135:y:2021:i:c:s0014292121000775
    DOI: 10.1016/j.euroecorev.2021.103724
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    Cited by:

    1. Giuseppe Berlingieri & Frank Pisch & Claudia Steinwender, 2021. "Organizing Global Supply Chains: Input-Output Linkages and Vertical Integration," Journal of the European Economic Association, European Economic Association, vol. 19(3), pages 1816-1852.
    2. Berlingieri, Giuseppe & Pisch, Frank & Steinwender, Claudia, 2018. "Organizing global supply chains: input costs shares and vertical integration," LSE Research Online Documents on Economics 91706, London School of Economics and Political Science, LSE Library.
    3. Eppinger, Peter & Kukharskyy, Bohdan, 2021. "Contracting institutions and firm integration around the world," European Economic Review, Elsevier, vol. 137(C).
    4. Liu, Mengxiao, 2021. "The missing option in firm boundary decisions," European Economic Review, Elsevier, vol. 132(C).
    5. Marta Bernasconi & Sara Galetti & Valeria Gattai & Piergiovanna Natale, 2022. "Contract Incompleteness and the Boundaries of the Firm in Times of COVID-19," Journal of Industry, Competition and Trade, Springer, vol. 22(3), pages 371-409, December.
    6. Matthias Fauth & Benjamin Jung & Wilhelm Kohler, 2023. "German Firms in International Trade: Evidence from Recent Microdata," CESifo Working Paper Series 10523, CESifo.

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    More about this item

    Keywords

    Global sourcing; Incomplete contracts; Property rights theory; Firm productivity;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F19 - International Economics - - Trade - - - Other
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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