Come Together: Firm Boundaries and Delegation
Laura Alfaro (Harvard Business School)
Nick Bloom (Stanford University)
Paola Conconi (Université Libre de Bruxelles)
Harald Fadinger (Mannheim University)
Patrick Legos (Université Libre de Bruxelles)
Andrew Newman (Boston University)
Raffaella Sadun (Harvard Business School)
John Van Reenen (MIT)

Abstract : Little is known theoretically, and even less empirically, about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which firms choose which suppliers to integrate and whether to delegate decisions to integrated suppliers. We test the predictions of the model using a novel dataset that combines measures of vertical integration and delegation for a large set of firms from many countries and industries. In line with the model’s predictions, we obtain three main results: (i) integration and delegation co-vary positively; (ii) producers are more likely to integrate suppliers in input sectors with greater productivity variation (as the option value of integration is greater); and (iii) producers are more likely to integrate suppliers of more important inputs and to delegate decisions to them.

How Wide is the Firm Border?
Enghin Atalay (University of Wisconsin Madison)
Ali Hortacsu (University of Chicago)
Mary Li (Compass Lexecon)
Chad Syverson (University of Chicago)

Abstract : We examine the within- and across-firm shipment decisions of tens of thousands of goods-producing and distributing establishments. This allows us to quantify the normally unobservable forces that determine firm boundaries; which transactions are mediated by ownership control, as opposed to contracts or markets. We find firm boundaries to be an economically significant barrier to trade: having an additional vertically integrated establishment in a given destination zip code has the same effect on shipment volumes as a 40 percent reduction in distance. We then calibrate a multi- sector trade model to quantify the economy-wide implications of transacting across vs. within firm boundaries.

Do Horizontal Mergers Affect Vertical Relationships Between Firms?
Silke Forbes (Tufts University)
Mara Lederman (University of Toronto)

Abstract : We empirically investigate the effect of recent horizontal mergers between major U.S. airlines on the vertical relationships that these airlines have with their regional airline partners. Regional airlines operate flights as subcontractors for major airlines under the major’s brand, while majors are responsible for pricing, marketing, and sales. We study whether the number and scope of the relationships between majors and regionals change after two majors merge with each other. We also investigate whether these changes lead to route entry and exit.

Better Bargaining or Better Care? Hospital Pricing and Quality Following Integration with Physician Practices
Haizhen Lin (Indiana University)
Ian McCarthy (Emory University)
Michael Richards (Vanderbilt University)

Abstract : Roughly one out of every six dollars in the U.S. economy flows to the health care sector -- a sector that is currently grappling with the causes and consequences of greater consolidation both horizontally and vertically. Despite much of the academic literature focusing on the effects of hospital mergers or system-joiners (i.e., horizontal integration), vertically integrated hospital-physician systems have become increasingly common. For example, recent research shows that health system ownership of physician practices in the U.S. more than tripled from 2009 to 2015 and now affects roughly a quarter of all physician practices. Motivated by these empirical trends, our focus in this paper concerns the effects of increased vertical integration between physicians and hospitals on hospital pricing and quality of care. We assemble a unique combination of data to investigate the effect of contemporary (2009-2015) vertical integration between hospitals and physicians on hospital pricing and performance across the U.S. Our estimation relies on both panel data methods as well as instrumental variable approaches, which comport well with the most closely related literature. Across our different identification strategies, we find a robust 3-7 percentage-point increase in hospital prices following vertical integration with local physician practices. There is little indication that hospital quality is commensurately higher, and all supplementary analyses point to stronger bargaining positions for hospitals when negotiating payment rates with insurers. Coupled with the existing literature, our findings encourage greater scrutiny of this industry trend in vertical integration by antitrust authorities.