Does vertical integration increase product quality?

Sanxi Li (), Xinyu Li () and Zhan Qu
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Sanxi Li: Renmin University of China
Xinyu Li: University of Groningen

Economic Theory Bulletin, 2023, vol. 11, issue 1, No 5, 69-80

Abstract: Abstract Numerous product quality scandals are caused by low-quality inputs. When input quality is not perfectly observed by downstream firms, upstream firms often have moral hazard problems. If vertical integration does not directly eliminate the moral hazard problems, does vertical integration still improve product quality? If so, under which conditions? We find that given the precision of monitoring technology used by downstream firms, when the level of public monitoring is very high or very low, downstream firms have no incentive to integrate upstream firms; when the level is intermediate, downstream firms have incentives to integrate and vertical integration increases product quality.

Keywords: Vertical integration; Asymmetric information; Supply chain; Product quality; Property right (search for similar items in EconPapers)
JEL-codes: D82 D86 L15 L23 Q12 Q18 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s40505-022-00240-4

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