NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Vertical Integration and Distance to Frontier

Daron Acemoglu, Philippe Aghion, Fabrizio Zilibotti

NBER Working Paper No. 9191
Issued in September 2002
NBER Program(s):   EFG

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.

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Document Object Identifier (DOI): 10.3386/w9191

Published: Daron Acemoglu & Philippe Aghion & Fabrizio Zilibotti, 2003. "Vertical Integration and Distance to Frontier," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 630-638, 04/05.

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