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Productivity and firm boundaries

Wilhelm Kohler and Marcel Smolka

European Economic Review, 2021, vol. 135, issue C

Abstract: We use property rights theory to study the effect of productivity on the trade-off between vertical integration and outsourcing at the firm-level. We develop a sharp empirical prediction that is robust across a range of property rights models, holding for single and multiple non-contractible inputs; any fixed cost difference between integration and outsourcing; and regardless of whether production is sequential or simultaneous in nature. Our prediction highlights a hitherto neglected ambiguity of the productivity effect that pushes firms towards integration in headquarter-intensive industries and towards outsourcing in supplier-intensive industries. We find considerable support for this prediction in Spanish firm-level data.

Keywords: Global sourcing; Incomplete contracts; Property rights theory; Firm productivity (search for similar items in EconPapers)
JEL-codes: F12 F19 F23 L22 L23 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.euroecorev.2021.103724

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