Technical efficiency and the vertical boundaries of the firm: theory and evidence

Fabio Pieri and Enrico Zaninotto

Applied Economics Letters, 2013, vol. 20, issue 17, 1538-1543

Abstract: This article provides a theoretical and empirical analysis of the relationship between firms' technical efficiency and the vertical organization of production. Technical inefficiency is explicitly introduced as the source of firms' heterogeneity in a Bertrand--Nash model of industry competition: the main prediction of the model is that the most efficient firms choose vertical integrated structures and the less-efficient ones choose disintegrated structures. The empirical part of the article rests on a stochastic frontier analysis (SFA) in a sample of about 400 Italian machine tool (MT) builders, and the result supports the prediction of the theoretical model.

Date: 2013
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DOI: 10.1080/13504851.2013.829177

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