Vertical Integration and Distance to Frontier

Daron Acemoglu, Fabrizio Zilibotti and Philippe Aghion

Scholarly Articles from Harvard University Department of Economics

Abstract: We construct a model where the equilibrium organization of firms changes as an economy approaches the world technology frontier. In vertically integrated firms, owners (managers) have to spend time both on production and innovation activities, and this creates managerial overload, and discourages innovation. Outsourcing of some production activities mitigates the managerial overload, but creates a holdup problem, causing some of the rents of the owners to be dissipated to the supplier. Far from the technology frontier, imitation activities are more important, and vertical integration is preferred. Closer to the frontier, the value of innovation increases, encouraging outsourcing.

Date: 2003
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Citations: View citations in EconPapers (61)

Published in Journal of the European Economic Association

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Journal Article: Vertical Integration and Distance to Frontier (2003)
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Working Paper: Vertical Integration and Distance to Frontier (2002)
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