Contractual Institutions, Financial Development and Vertical Integration: Theory and Evidence
Rocco Macchiavello ()
No 392, Economics Series Working Papers from University of Oxford, Department of Economics
This paper presents an industry equilibrium model of vertical integration under contractual imperfections with specific input suppliers and external investors. I assume that vertical integration economizes on the needs for contracts with specific input suppliers at the cost of higher fixed costs. I show that contractual frictions with external investors affect vertical integration through two opposing channels whose relative intensities depend on other determinants of firms size distribution in the industry. Using cross-country-industry data, I present novel evidence on the institutional determinants of international differences in vertical integration which is consistent with the predictions of the theoretical model. In particular, I show that countries with more developed financial systems are relatively more vertically integrated in industries that employ a high share of workers in large firms.
Keywords: Vertical Integration; Credit Constraints; Contract Enforcement; Developing Countries; Industry; Equilibrium (search for similar items in EconPapers)
JEL-codes: D23 L11 L22 O14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-ore
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Working Paper: Contractual Institutions, Financial Development and Vertical Integration: Theory and Evidence (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:oxf:wpaper:392
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