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Vertical integration and technology: theory and evidence

Author

Listed:
  • Daron Acemoglu

    (Institute for Fiscal Studies)

  • Philippe Aghion

    () (Institute for Fiscal Studies and Harvard University)

  • Rachel Griffith

    () (Institute for Fiscal Studies and IFS and Manchester)

  • Fabrizio Zilibotti

    (Institute for Fiscal Studies)

Abstract

This paper investigates the determinants of vertical integration using data from the UK manufacturing sector. We find that the relationship between a downstream (producer) industry and an upstream (supplier) industry us more likely to be vertically integrated when the producing industry is more technology intensive and the supplying industry is less technology intensive. Moreover, both of these effects are stronger when the supplying industry accounts for a large fraction of the producer\\\'s costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation straegies, and with or without contraolling for a number of firm and industry-level characteristics. They are consistent with the incomplete contract theories of the firm that emphasize both the potential costs and benefits of vertical integration in terms of investment incentives.

Suggested Citation

  • Daron Acemoglu & Philippe Aghion & Rachel Griffith & Fabrizio Zilibotti, 2004. "Vertical integration and technology: theory and evidence," IFS Working Papers W04/34, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:04/34
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    References listed on IDEAS

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    Keywords

    holdup; incomplete contracts; internal organisation fo the firm; investment; R&D; technology; vertical integration;

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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