Vertical Integration and Technology: Theory and Evidence
54 Pages Posted: 2 Nov 2005
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Vertical Integration and Technology: Theory and Evidence
Vertical Integration and Technology: Theory and Evidence
Date Written: September 2005
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.
Keywords: Hold-up, incomplete contracts, internal organization of the firm, investment, residual rights of control, R&D, technology, UK manufacturing, vertical integration
JEL Classification: L22, L23, L24
Suggested Citation: Suggested Citation
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