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Vertical integration and technology: theory and evidence

  • 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)

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.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W04/34.

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Length: 49 pp.
Date of creation: Dec 2004
Date of revision:
Handle: RePEc:ifs:ifsewp:04/34
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