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Vertical Integration and Distance to Frontier

  • Acemoglu, Daron
  • Aghion, Philippe
  • Zilibotti, Fabrizio

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3565.

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Date of creation: Oct 2002
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Handle: RePEc:cpr:ceprdp:3565
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  1. Francois, P. & Roberts, J., 2001. "Contracting Productivity Growth," Discussion Paper 2001-35, Tilburg University, Center for Economic Research.
  2. Acemoglu, Daron & Zilibotti, Fabrizio, 1999. " Information Accumulation in Development," Journal of Economic Growth, Springer, vol. 4(1), pages 5-38, March.
  3. Daron Acemoglu & Philippe Aghion & Fabrizio Zilibotti, 2006. "Distance to Frontier, Selection, and Economic Growth," Journal of the European Economic Association, MIT Press, vol. 4(1), pages 37-74, 03.
  4. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Martimort, D. & Verdier, T., 1999. "Monopolies Life Cycle, Bureaucratization and Schumpeterian Growth," Papers 1999-09, Laval - Laboratoire Econometrie.
  6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  7. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
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