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From Flexibility to Insecurity: How Vertical Separation Amplifies Firm-level Uncertainty


  • David Thesmar
  • Mathias Thoenig


This article presents a model where firms may endogenously externalize part of their production process. We start from the premise that adaptation to uncertainty cannot be contracted upon in the worker/employer relationship. Vertical separation then balances flexibility gains against hold-up costs of opportunistic behavior by outside contractors. In equilibrium, the degree of separation is shown to depend on the degree of product market competition, contractor's bargaining power, and the volatility of demand shocks. Our main result is that an increase in the degree of vertical separation amplifies the elasticity to demand shocks of firms' sales and employment. It does not, however, amplify aggregate uncertainty. Evidence from firm-level data is shown to be largely consistent with the main implications of our theory. (JEL: L16, L23, L24) (c) 2007 by the European Economic Association.

Suggested Citation

  • David Thesmar & Mathias Thoenig, 2007. "From Flexibility to Insecurity: How Vertical Separation Amplifies Firm-level Uncertainty," Journal of the European Economic Association, MIT Press, vol. 5(6), pages 1161-1202, December.
  • Handle: RePEc:tpr:jeurec:v:5:y:2007:i:6:p:1161-1202

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    References listed on IDEAS

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    Cited by:

    1. Viete, Steffen & Erdsiek, Daniel, 2015. "Mobile information and communication technologies, flexible work organization and labor productivity: Firm-level evidence," ZEW Discussion Papers 15-087, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. Bloom, Nicholas & Van Reenen, John, 2011. "Human Resource Management and Productivity," Handbook of Labor Economics, Elsevier.
    3. Picard, Pierre M. & Wildasin, David E., 2011. "Outsourcing, labor market pooling, and labor contracts," Journal of Urban Economics, Elsevier, vol. 70(1), pages 47-60, July.
    4. Lommerud, Kjell Erik & Meland, Frode & Straume, Odd Rune, 2009. "Can deunionization lead to international outsourcing?," Journal of International Economics, Elsevier, vol. 77(1), pages 109-119, February.
    5. Picard, Pierre M. & Wildasin, David, 2009. "Labor Market Pooling, Outsourcing and Labor Contracts," IZA Discussion Papers 4357, Institute for the Study of Labor (IZA).
    6. David Thesmar & Mathias Thoenig, 2011. "Contrasting Trends in Firm Volatility," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 143-180, October.
    7. Hijzen, Alexander & Swaim, Paul, 2010. "Offshoring, labour market institutions and the elasticity of labour demand," European Economic Review, Elsevier, vol. 54(8), pages 1016-1034, November.
    8. Espen Bratberg & Kjell G. Salvanes & Kjell Vaage, 2010. "Has Job Stability Decreased? Population Data from a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(1), pages 163-183, March.
    9. Matsushima, Noriaki & Mizuno, Tomomichi, 2013. "Vertical separation as a defense against strong suppliers," European Journal of Operational Research, Elsevier, vol. 228(1), pages 208-216.

    More about this item

    JEL classification:

    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures


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