Paola Conconi (ECARES and CEPR)

“All Together Now: Integration, Delegation and Management”

abstract

Abstract Little is known theoretically, and even less empirically, about the relationship between firm boundary choices and the allocation of decision rights within firms. We develop a model in which firms choose which suppliers to integrate, whether to delegate decisions to integrated suppliers or keep them centralized, and the quality of central management. The final good producer discovers the productivity of a supplier only after integration. In this setting, integration has an option value, since it allows the final good producer to choose whether to delegate decisions to the suppliers or to keep control. We test the predictions of this model using a matched dataset that combines measures of vertical integration, delegation, and management practices for a large set of firms operating in many countries and industries. In line with the model’s predictions, we find that integration and delegation co-vary, that this effect vanishes once management is controlled for, and that suppliers from sectors with greater productivity variation are more likely to be integrated with their downstream customers.