Idiosyncratic Investments, Outside Opportunities and the Boundaries of the Firm

Rudolf Kerschbamer, Yanni Tournas and Nina Maderner

No 2558, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper adopts the incomplete contracting perspective to study a firm?s continuous choice between producing an essential input in-house (full integration), contracting part of the production out (tapered integration), and contracting all of the production out (non-integration), when (i) an idiosyncratic capacity investment is required to produce the essential input and (ii) under non-integration, outside opportunities are better. We show that the firm?s boundary choice depends crucially on its commitment power. If the firm can pre-commit to a particular provision mode, tapered integration will be chosen more frequently. Also, with commitment power the firm will never subcontract only a small portion of its input needs. In-house capacity is in general smaller and outside capacity larger if the firm can pre-commit. Total capacity is never larger in the commitment than the non-commitment case.

Keywords: Boundary choice; Relation-specific investment; Incomplete contracts; Transaction costs (search for similar items in EconPapers)
JEL-codes: C23 L14 L22 L23 (search for similar items in EconPapers)
Date: 2000-09
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP2558 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Idiosyncratic investments, outside opportunities and the boundaries of the firm (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:2558

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP2558

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().