DP5258 Vertical Integration and Technology: Theory and Evidence

Author(s): Daron Acemoglu , Philippe Aghion , Rachel Griffith , Fabrizio Zilibotti

Publication Date: September 2005

Keyword(s): hold-up , incomplete contracts , internal organisation of the firm , investment , residual rights of control , R&D , technology , UK manufacturing , vertical integration

JEL(s): L22 , L23 , L24

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP5258.asp

This paper investigates the determinants of vertical integration. We first derive a number of predictions regarding the relationship between technology intensity and vertical integration from a simple incomplete contracts model. Then, we investigate these predictions using plant-level data for the UK manufacturing sector. Most importantly, and consistent with theory, we find that the technology intensities of downstream (producer) and upstream (supplier) industries have opposite effects on the likelihood of vertical integration. Also consistent with theory, both 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.