Vertical integration and technology: theory and evidence

Vertical integration and technology: theory and evidence
Document type
Working Paper
Author(s)
Acemoglu, Daron; Aghion, Philippe; Griffith, Rachel
Publisher
Institute for Fiscal Studies
Date of publication
3 December 2004
Series
The Institute for Fiscal Studies Working Papers
Subject(s)
Trends: economic, social and technology trends affecting business
Collection
Business and management
Material type
Reports

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This paper investigates the determinants of vertical integration using data from the UK manufacturing sector. The authors find that the relationship between a downstream (producer) industry and un upstream (supplier) industry is more likely to be vertically integrated when the producing industry is more technology intensive and the supplying industry is less technology intensive. Moreover, both of these effects are stronger when the supplying industry accounts for a large fraction of the producer's costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation strategies, and with or without controlling for a number of firm and industry-level characteristics. They are consistent with the incomplete contract theories of the firm that emphasize both the potential costs and benefits of vertical integration in terms of investment incentives.

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