Come Together: Firm Boundaries and Delegation

Abstract : We jointly study firm boundaries and the allocation of decision rights within them by confronting an incomplete-contracts model with data on vertical integration and delegation for thousands of firms around the world. Integration has an option value: it confers authority to delegate or centralize decision rights, depending on who can best solve problems that arise in the course of an uncertain production process. The model can explain why more vertically integrated firms tend to delegate more, as observed in our data. In line with the model’s predictions, we find that firms are more likely to integrate suppliers that produce more valuable inputs and operate in industries with more dispersed productivity, and that firms delegate more decisions to integrated suppliers that produce more valuable inputs and operate in more productive industries.

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Productivity Gains from Labor Outsourcing: the Role of Trade Secrets

Abstract : How quickly producers can adjust their workforce with changing demand is important for aggregate productivity. Labor outsourcing allows quick adjustments but potentially exposes sensitive information to outsiders, which may deter producers from outsourcing if the legal system does not adequately protect secret information. I quantify the impact of trade secret protection on labor outsourcing, and consequently, on aggregate productivity. First, using event studies and difference-in-differences around the staggered adoption of the Uniform Trade Secrets Act, I show that better trade secret protection leads to increased outsourcing. Second, to quantify the resulting gains in productivity, I build a structural model of outsourcing and multi-industry dynamics and estimate it with data from the U.S. manufacturing sector. I decompose the cross-state differences in labor outsourcing into differences in firing cost, industry composition, demand volatility, and trade secret protection. Strengthening trade secret protection for all states to match the state with the strictest protection would increase outsourcing employment by 29% and aggregate output by 0.8%.

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Managing Global Production: Theory and Evidence from Just-in-time Supply Chains

Abstract : This paper examines the structure of international Just-in-Time (JIT) supply chains. Using information about JIT supply chain management for a large panel of French manufacturers I first document that JIT is widespread across all industries and accounts for roughly two thirds of aggregate employment and trade. Next, I establish two novel stylized facts about the structure of JIT supply chains: They are more concentrated in space (1) and more vertically integrated both domestically and internationally (2), than their `traditional' counterparts. I rationalize these patterns in a framework of sequential production where failure to coordinate adaptation decisions in the presence of upstream and demand shocks leads to inventory holding. In JIT supply chains, information about downstream demand conditions is shared throughout the supply chain, which facilitates coordination. The associated inventory saving effect is stronger when firms are close to each other, so that the supply chain reacts quickly to changes in demand; and when they are part of the same company, so that incentives for adaptation are aligned. Guided by further predictions of the model, I present empirical evidence that these organizational complementarities depend on inventory holding costs, demand persistence, and the ability to push inventories upstream via contractual penalties. Finally, I discuss long term implications of Brexit and COVID-19 for the structure of international supply chains based on my findings.

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