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Come Together: Firm Boundaries and Delegation

Author

Listed:
  • Alfaro, Laura
  • Bloom, Nicholas
  • Conconi, Paola
  • Fadinger, Harald
  • Legros, Patrick
  • Newman, Andrew
  • Sadun, Raffaella
  • Van Reenen, John

Abstract

Little is known theoretically, and even less empirically, about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which firms choose which suppliers to integrate and whether to delegate decisions to integrated suppliers. We test the predictions of the model using a novel dataset that combines measures of vertical integration and delegation for a large set of firms from many countries and industries. In line with the model's predictions, we obtain three main results: (i) integration and delegation co-vary positively; (ii) producers are more likely to integrate suppliers in input sectors with greater productivity variation (as the option value of integration is greater); and (iii) producers are more likely to integrate suppliers of more important inputs and to delegate decisions to them.

Suggested Citation

  • Alfaro, Laura & Bloom, Nicholas & Conconi, Paola & Fadinger, Harald & Legros, Patrick & Newman, Andrew & Sadun, Raffaella & Van Reenen, John, 2018. "Come Together: Firm Boundaries and Delegation," CEPR Discussion Papers 12923, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12923
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    References listed on IDEAS

    as
    1. Nicholas Bloom & Luis Garicano & Raffaella Sadun & John Van Reenen, 2014. "The Distinct Effects of Information Technology and Communication Technology on Firm Organization," Management Science, INFORMS, vol. 60(12), pages 2859-2885, December.
    2. Nicholas Bloom & John Van Reenen, 2007. "Measuring and Explaining Management Practices Across Firms and Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 122(4), pages 1351-1408.
    3. Woodruff, Christopher, 2002. "Non-contractible investments and vertical integration in the Mexican footwear industry," International Journal of Industrial Organization, Elsevier, vol. 20(8), pages 1197-1224, October.
    4. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    5. Laura Alfaro & Paola Conconi & Harald Fadinger & Andrew F. Newman, 2016. "Do Prices Determine Vertical Integration?," Review of Economic Studies, Oxford University Press, vol. 83(3), pages 855-888.
    6. Eric Van den Steen, 2010. "Interpersonal Authority in a Theory of the Firm," American Economic Review, American Economic Association, vol. 100(1), pages 466-490, March.
    7. Nicholas Bloom & Raffaella Sadun & John Van Reenen, 2010. "Does Product Market Competition Lead Firms to Decentralize?," American Economic Review, American Economic Association, vol. 100(2), pages 434-438, May.
    8. Fan, Joseph P H & Lang, Larry H P, 2000. "The Measurement of Relatedness: An Application to Corporate Diversification," The Journal of Business, University of Chicago Press, vol. 73(4), pages 629-660, October.
    9. Silke J. Forbes & Mara Lederman, 2010. "Does vertical integration affect firm performance? Evidence from the airline industry," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 765-790, December.
    10. Joskow, Paul L, 1987. "Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets," American Economic Review, American Economic Association, vol. 77(1), pages 168-185, March.
    11. Milgrom, Paul & Roberts, John, 1990. "The Economics of Modern Manufacturing: Technology, Strategy, and Organization," American Economic Review, American Economic Association, vol. 80(3), pages 511-528, June.
    12. Michael Powell, 2015. "An Influence-Cost Model of Organizational Practices and Firm Boundaries," Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(suppl_1), pages 104-142.
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    Cited by:

    1. Berlingieri, Giuseppe & Pisch, Frank & Steinwender, Claudia, 2018. "Organizing Global Supply Chains: Input Cost Shares and Vertical Integration," CEPR Discussion Papers 13321, C.E.P.R. Discussion Papers.
    2. Giuseppe Berlingieri & Frank Pisch & Claudia Steinwender, 2018. "Organizing Global Supply Chains: Input-Output Linkages and Vertical Integration," CEP Discussion Papers dp1583, Centre for Economic Performance, LSE.

    More about this item

    Keywords

    Decentralization; real options; supply assurance; vertical integration;

    JEL classification:

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

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