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Vertical Integration and Distance to Frontier

Author

Listed:
  • Daron Acemoglu

    (Massachusetts Institute of Technology,)

  • Philippe Aghion

    (Harvard University and University College London,)

  • Fabrizio Zilibotti

    (University College London,)

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. (JEL: L22, O31, O33, O38, O40, L16) Copyright (c) 2003 The European Economic Association.

Suggested Citation

  • 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:tpr:jeurec:v:1:y:2003:i:2-3:p:630-638
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    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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