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Vertical Integration and Technology: Theory and Evidence

Author

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

Abstract

This paper investigates the determinants of vertical integration. We first derive a number of predictions regarding the relationship between technology intensity and vertical integration from a simple incomplete contracts model. Then, we investigate these predictions using plant-level data for the UK manufacturing sector. Most importantly, and consistent with theory, we find that the technology intensities of downstream (producer) and upstream (supplier) industries have opposite effects on the likelihood of vertical integration. Also consistent with theory, both 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.

Suggested Citation

  • Daron Acemoglu & Philippe Aghion & Rachel Griffith & Fabrizio Zilibotti, 2007. "Vertical Integration and Technology: Theory and Evidence," IEW - Working Papers 342, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:342
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    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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