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.

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