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Vertical Integration and Distance to Frontier


Acemoglu, Daron; Aghion, Philippe; Zilibotti, Fabrizio (2003). Vertical Integration and Distance to Frontier. Journal of the European Economic Association, 1(2-3):630-638.

Abstract

We construct a model where the equilibrium organization of firms changes as an economy approaches the world technology frontier. In vertically integrated firms, owners (managers) have to spend time both on production and innovation activities, and this creates managerial overload, and discourages innovation. Outsourcing of some production activities mitigates the managerial overload, but creates a holdup problem, causing some of the rents of the owners to be dissipated to the supplier. Far from the technology frontier, imitation activities are more important, and vertical integration is preferred. Closer to the frontier, the value of innovation increases, encouraging outsourcing.

We construct a model where the equilibrium organization of firms changes as an economy approaches the world technology frontier. In vertically integrated firms, owners (managers) have to spend time both on production and innovation activities, and this creates managerial overload, and discourages innovation. Outsourcing of some production activities mitigates the managerial overload, but creates a holdup problem, causing some of the rents of the owners to be dissipated to the supplier. Far from the technology frontier, imitation activities are more important, and vertical integration is preferred. Closer to the frontier, the value of innovation increases, encouraging outsourcing.

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22 citations in Web of Science®
33 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:2003
Deposited On:25 Mar 2008 17:07
Last Modified:05 Apr 2016 12:22
Publisher:MIT Press
ISSN:1542-4766
Publisher DOI:10.1162/154247603322391260
Permanent URL: http://doi.org/10.5167/uzh-2309

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