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Vertical Integration and Distance to Frontier

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

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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File URL: http://dash.harvard.edu/bitstream/handle/1/4481512/aghion_verticalintegration.pdf
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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 4481512.

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Date of creation: 2003
Date of revision:
Publication status: Published in Journal of the European Economic Association
Handle: RePEc:hrv:faseco:4481512
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  1. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  2. Martimort, David & Verdier, Thierry, 2001. "Monopolies Life Cycle, Bureaucratization, and Schumpeterian Growth," CEPR Discussion Papers 2700, C.E.P.R. Discussion Papers.
  3. repec:ner:ucllon:http://discovery.ucl.ac.uk/17678/ is not listed on IDEAS
  4. Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Acemoglu, D. & Zilibotti, F., 1998. "Information Accumulation in Development," Papers 652, Stockholm - International Economic Studies.
  6. Daron Acemoglu & Philippe Aghion & Fabrizio Zilibotti, 2002. "Distance to Frontier, Selection, and Economic Growth," NBER Working Papers 9066, National Bureau of Economic Research, Inc.
  7. Gene M. Grossman & Elhanan Helpman, 2002. "Integration versus Outsourcing in Industry Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 85-120.
  8. Francois, P. & Roberts, J., 2001. "Contracting Productivity Growth," Discussion Paper 2001-35, Tilburg University, Center for Economic Research.
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