Incomplete Contracts and Industrial Organization

Gene Grossman and Elhanan Helpman

Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research

Abstract: We develop an equilibrium model of industrial structure in which the organization of firms is endogenous. Differentiated consumer products can be produced either by vertically integrated firms or by pairs of specialized companies. Production of each variety of consumer good requires a unique, specialized component. Vertically integrated firms can manufacture the components they need in the quantity and type that maximizes profits, but they face a relatively high cost of governance. Specialized firms can produce at lower cost, but input suppliers face a potential hold-up problem. We study the equilibrium mode of organization when inputs are fully or partially specialized. We consider how the degree of competition in the market and other parameters affect the equilibrium choices, and how the equiliberium compares with the efficient allocation.

Date: 1999
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Working Paper: Incomplete Contracts and Industrial Organization (1999)
Working Paper: Incomplete Contracts and Industrial Organization (1999)
Working Paper: Incomplete Contracts and Industrial Organization (1999)
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