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Why Do Firms Own Production Chains?

  • Enghin Atalay
  • Ali Hortacsu
  • Chad Syverson

We use broad-based yet detailed data from the economy's goods-producing sectors to investigate firms' ownership of production chains. It does not appear that vertical ownership is primarily used to facilitate transfers of goods along the production chain, as is often presumed: Roughly one-half of upstream plants report no shipments to their firms' downstream units. We propose an alternative explanation for vertical ownership, namely that it promotes efficient intra-firm transfers of intangible inputs. We show evidence consistent with this hypothesis, including the fact that upon a change of ownership, an acquired plant begins to resemble the acquiring firm along multiple dimensions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18020.

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Date of creation: Apr 2012
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Publication status: published as Atalay, Enghin, Ali Hortaçsu, and Chad Syverson. 2014. "Vertical Integration and Input Flows." American Economic Review, 104(4): 1120-48. DOI: 10.1257/aer.104.4.1120
Handle: RePEc:nbr:nberwo:18020
Note: IO PR
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  1. Acemoglu, Daron & Aghion, Philippe & Griffith, Rachel & Zilibotti, Fabrizio, 2005. "Vertical Integration and Technology: Theory and Evidence," CEPR Discussion Papers 5258, C.E.P.R. Discussion Papers.
  2. Adriano Rampini & Andrea Eisfeldt, 2007. "Leasing, Ability to Repossess, and Debt Capacity," Working Papers 07-19, Center for Economic Studies, U.S. Census Bureau.
  3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
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  6. Vojislav Maksimovic & Gordon Phillips & Nagpurnanand Prabhala, 2011. "Post-Merger Restructuring and the Boundaries of the Firm," Working Papers 11-11, Center for Economic Studies, U.S. Census Bureau.
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  8. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
  9. Lafontaine, Francine & Slade, Margaret, 2007. "Vertical Integration and Firm Boundaries : The Evidence," The Warwick Economics Research Paper Series (TWERPS) 799, University of Warwick, Department of Economics.
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  12. Luis Garicano & Thomas N. Hubbard, 2007. "The Return to Knowledge Hierarchies," NBER Working Papers 12815, National Bureau of Economic Research, Inc.
  13. Luis Garicano & Esteban Rossi-Hansberg, 2005. "Organization and Inequality in a Knowledge Economy," NBER Working Papers 11458, National Bureau of Economic Research, Inc.
  14. Chad Syverson, 2004. "Product Substitutability and Productivity Dispersion," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 534-550, May.
  15. Chad Syverson, 2010. "What Determines Productivity?," NBER Working Papers 15712, National Bureau of Economic Research, Inc.
  16. Teece, David J., 1982. "Towards an economic theory of the multiproduct firm," Journal of Economic Behavior & Organization, Elsevier, vol. 3(1), pages 39-63, March.
  17. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  18. Russell Hillberry & David Hummels, 2002. "Intra-national Home Bias: Some Explanations," NBER Working Papers 9022, National Bureau of Economic Research, Inc.
  19. Gollop, Frank M & Monahan, James L, 1991. "A Generalized Index of Diversification: Trends in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 318-30, May.
  20. Thomas J. Holmes & John J. Stevens, 2010. "An Alternative Theory of the Plant Size Distribution with an Application to Trade," NBER Working Papers 15957, National Bureau of Economic Research, Inc.
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