Come Together: Firm Boundaries and Delegation

Laura Alfaro (Harvard)
Nicholas Bloom (Stanford)
Paola Conconi (ECARES)
Harald Fadinger (Mannheim)
Patrick Legros (ECARES)
Andy Newman (Boston University)
Raffaella Sadun (Harvard)
John Van Reenen (MIT)

Abstract : Little is known about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which final good producers choose which suppliers to integrate and whether to delegate decisions to integrated suppliers, when there is uncertainty in the production process. In this setting, integration has an option value: ownership rights give firm owners authority to delegate or centralize production decisions, depending on who can best solve the realized problems. To assess the evidence, we construct measures of vertical integration and delegation for thousands of firms in many countries and industries. Consistent with the model, we find that firms are more likely to delegate to suppliers of more valuable inputs and are more likely to integrate suppliers that produce more valuable inputs. Moreover, input risk increases the probability that a firm integrates a supplier, but has no impact on delegation choices

Adverse Selection in Agenda Setting

S. Nageeb Ali (Pennsylvania State University)
Maximilian Mihm (NYU-Abu Dhabi)
Lucas Siga (NYU-Abu Dhabi)

Abstract : Adverse Selection in Agenda-Setting studies the costs and benefits of flexibility in designing government policies. It argues that adverse selection is a key problem in these settings: an individual who proposes a reform typically knows more about its effects than the ones who must approve or reject that reform. Increasing the proposer’s freedom to design the reform can exacerbate this adverse selection problem. If the proposer has a lot of freedom, then gridlock can result: the reform is always rejected in equilibrium. The paper argues that certain types of oversight can mitigate this adverse selection problem, lead the proposer to moderate her proposed reform, and break the resulting gridlock.

Too Big for Their Boots

Daniel Barron (Northwestern)
Yingni Guo (Northwestern)
Bryony Reich (Northwestern)

Abstract : This paper studies wealth accumulation in communities. We develop a model of favor exchange among households in a community and their investment decisions. Our result identifies a key obstacle to wealth accumulation: wealth crowds out favor exchange. Thus, households under-invest, since growing their wealth would entail losing the support of the community. The result is a persistent wealth gap between such communities and the rest of the economy. Using numerical simulations, we show that increased productivity outside the community exacerbates under-investment inside the community, while strengthening kinship, friendship, or religious ties within the community encourages wealth accumulation.