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Vertical Integration and Technology: Theory and Evidence

  • Daron Acemoglu
  • Philippe Aghion
  • Rachel Griffith
  • Fabrizio Zilibotti

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 is 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 strategies, and with or without controlling 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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File URL: http://www.nber.org/papers/w10997.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10997.

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Date of creation: Dec 2004
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Publication status: published as Daron Acemoglu & Philippe Aghion & Rachel Griffith & Fabrizio Zilibotti, 2010. "Vertical Integration and Technology: Theory and Evidence," Journal of the European Economic Association, MIT Press, vol. 8(5), pages 989-1033, 09.
Handle: RePEc:nbr:nberwo:10997
Note: CF EFG IO
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