Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development

Sharon Novak and Scott Stern

No 13232, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines complementarity among vertical integration decisions in automobile product development. Though most research assumes that contracting choices are independent of each other, contracting complementarity arises when the returns to a single vertical integration decision are increasing in the level of vertical integration associated with other contracting choices. First, effective coordination may depend on the level of (non-contractible) effort on the part of each agent; contracting complementarity results if coordination efforts are interdependent and vertical integration facilitates a higher level of non-contractible effort. Second, effective coordination may require the disclosure of proprietary trade secrets, and the potential for expropriation by external suppliers may induce complementarity among vertical integration choices. We provide evidence for complementarity in product development contracting by taking advantage of a detailed dataset that includes the level of vertical integration and the contracting environment for individual automobile systems in the luxury automobile segment. Using an instrumental variables framework that distinguishes complementarity from unobserved firm-level factors, the evidence is consistent with the hypothesis that contracting complementarity is an important driver of vertical integration choices. The findings suggest that contracting complementarity may be particularly important when coordination is important to achieve but difficult to monitor.

JEL-codes: L24 L62 O32 (search for similar items in EconPapers)
Date: 2007-07
New Economics Papers: this item is included in nep-com
Note: IO PR
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Published as Complementarity among vertical integration decisions: evidence from automobile product development Management Science, Vol. 55, No. 2. (2009), pp. 311-332 by S. Novak, S. Stern posted to automobile complementarity file-import-09-12-23 industry integration outsourcing strategies vertical by whutabarat on 2009-12-23 14:43:53

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