Vertical Integration and Distance to Frontier

Philippe Aghion, Daron Acemoglu and Fabrizio Zilibotti

No 3565, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Economic growth; Contracts; Internal organization of the firm; Vertical integration (search for similar items in EconPapers)
JEL-codes: L16 L22 O31 O33 O38 O40 (search for similar items in EconPapers)
Date: 2002-10
New Economics Papers: this item is included in nep-ind
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Citations: View citations in EconPapers (35)

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