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Contractual Institutions, Financial Development and Vertical Integration: Theory and Evidence

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  • Rocco Macchiavello

Abstract

This paper presents an industry equilibrium model of vertical integration under contractual imperfections with specific input suppliers and external investors. I assume that vertical integration economizes on the needs for contracts with specific input suppliers at the cost of higher fixed costs. I show that contractual frictions with external investors affect vertical integration through two opposing channels whose relative intensities depend on other determinants of firms size distribution in the industry. Using cross-country-industry data, I present novel evidence on the institutional determinants of international differences in vertical integration which is consistent with the predictions of the theoretical model. In particular, I show that countries with more developed financial systems are relatively more vertically integrated in industries that employ a high share of workers in large firms.

Suggested Citation

  • Rocco Macchiavello, 2008. "Contractual Institutions, Financial Development and Vertical Integration: Theory and Evidence," Economics Series Working Papers 392, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:392
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    Cited by:

    1. Macchiavello, Rocco, 2007. "Financial Constraints and the Costs and Benefits of Vertical Integration," CEPR Discussion Papers 6104, C.E.P.R. Discussion Papers.
    2. Luigi Pascali, 2009. "Contract Incompleteness, Globalization and Vertical Structure: an Empirical Analysis," Boston College Working Papers in Economics 727, Boston College Department of Economics.
    3. Johan F.M. Swinnen & Anneleen Vandeplas, 2007. "Vertical coordination, rent distribution, and development," LICOS Discussion Papers 18407, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    4. Swinnen Johan & Vandeplas Anneleen, 2012. "Rich Consumers and Poor Producers: Quality and Rent Distribution in Global Value Chains," Journal of Globalization and Development, De Gruyter, pages 1-30.
    5. Macchiavello, Rocco, 2010. "Vertical integration and investor protection in developing countries," Journal of Development Economics, Elsevier, pages 162-172.
    6. Barbosa, Natália & Faria, Ana Paula, 2011. "Innovation across Europe: How important are institutional differences?," Research Policy, Elsevier, pages 1157-1169.
    7. Rocco Macchiavello, 2007. "Vertical Integration, Missing Middle and Investor Protection in Developing Countries," Economics Series Working Papers 373, University of Oxford, Department of Economics.

    More about this item

    Keywords

    Vertical Integration; Credit Constraints; Contract Enforcement; Developing Countries; Industry; Equilibrium;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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