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Organizational decisions in multistage production processes

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  • Nowak, Verena

Abstract

Organizational decisions in multistage production processes are often not made by the downstream headquarter firm, but by the various intermediate inputs suppliers along the value chain themselves. We assume a production process with one headquarter (final good producer) and two suppliers at different positions within the chain. In this environment with incomplete contracts and relationshipspecific investments, the firm decides only on the organizational form of her direct supplier, who in turn decides whether to outsource or to vertically integrate his own supplier. We find that the producer's and the supplier's organizational decisions are interrelated, particularly when production decisions occur sequentially. For instance, our model predicts that a higher technological importance of the downstream supplier raises the probability that the upstream supplier is vertically integrated. We also compare our model to the framework by Antras and Chor (2013) who assume that the headquarter makes all organizational decisions along the value chain. Then, we assume firms to be able to freely decide on their organizational decision structure and find for instance that firms with a higher overall productivity are more likely to choose a structure where the suppliers decide themselves on their suppliers' organizational forms.

Suggested Citation

  • Nowak, Verena, 2014. "Organizational decisions in multistage production processes," DICE Discussion Papers 169, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  • Handle: RePEc:zbw:dicedp:169
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    References listed on IDEAS

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    1. Pol Antràs & Davin Chor, 2013. "Organizing the Global Value Chain," Econometrica, Econometric Society, vol. 81(6), pages 2127-2204, November.
    2. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    3. Baldwin, Richard & Venables, Anthony J., 2013. "Spiders and snakes: Offshoring and agglomeration in the global economy," Journal of International Economics, Elsevier, vol. 90(2), pages 245-254.
    4. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    5. Pol Antras & Elhanan Helpman, 2004. "Global Sourcing," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 552-580, June.
    6. Verena Nowak & Christian Schwarz & Jens Suedekum, 2016. "Asymmetric spiders: Supplier heterogeneity and the organization of firms," Canadian Journal of Economics, Canadian Economics Association, vol. 49(2), pages 663-684, May.
    7. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    8. Schwarz, Christian & Suedekum, Jens, 2014. "Global sourcing of complex production processes," Journal of International Economics, Elsevier, vol. 93(1), pages 123-139.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    outsourcing; vertical integration; property rights; sequential production processes;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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