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Outsourcing when Investments are Specific and Complementary

  • Alla Lileeva
  • Johannes Van Biesebroeck

Using the universe of large Canadian manufacturing firms in 1988 and 1996, we investigate to what extent firms' outsourcing decision can be explained by a simple property rights model. A novel aspect of the data is the availability of component level information on outputs as well as inputs which permits the construction of a very detailed measure of vertical integration. Moreover, we construct five different measures of technological intensity to proxy for investments that are likely to be specific to a buyer-seller relationship. Our main findings are that (i) greater specificity makes outsourcing less likely; (ii) complementarities between the investments of the buyer and the seller are also associated with less outsourcing; (iii) only when we focus on the range of transactions with low complementarities do we find support for several nuanced predictions of the property rights model.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-287.

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Length: 45 pages
Date of creation: 22 May 2007
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Handle: RePEc:tor:tecipa:tecipa-287
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