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Come together: firm boundaries and delegation

Author

Listed:
  • Laura Alfaro
  • Nick Bloom
  • Paola Conconi
  • Harald Fadinger
  • Patrick Legros
  • Andrew F. Newman
  • Raffaella Sadun
  • John Van Reenen

Abstract

We jointly study firm boundaries and the allocation of decision rights within them by confronting an incomplete-contracts model with data on vertical integration and delegation for thousands of firms around the world. Integration has an option value: it confers authority to delegate or centralize decision rights, depending on who can best solve problems that arise in the course of an uncertain production process. The model can explain why more vertically integrated firms tend to delegate more, as observed in our data. In line with the model's predictions, we find that firms are more likely to integrate suppliers that produce more valuable inputs and operate in industries with more dispersed productivity, and that firms delegate more decisions to integrated suppliers that produce more valuable inputs and operate in more productive industries.

Suggested Citation

  • Laura Alfaro & Nick Bloom & Paola Conconi & Harald Fadinger & Patrick Legros & Andrew F. Newman & Raffaella Sadun & John Van Reenen, 2018. "Come together: firm boundaries and delegation," CEP Discussion Papers dp1547, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1547
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. 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.
    3. Marcus Biermann, 2022. "The role of management practices in acquisitions and the FDI location decision," Review of International Economics, Wiley Blackwell, vol. 30(1), pages 137-165, February.
    4. Gary B. Gorton & Alexander K. Zentefis, 2020. "Corporate Culture as a Theory of the Firm," NBER Working Papers 27353, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    integration; delegation; uncertainty; real options; supply assurance;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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