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  • 2020
  • Working Paper
  • HBS Working Paper Series

Come Together: Firm Boundaries and Delegation

By: Laura Alfaro, Nick Bloom, Paola Conconi, Harald Fadinger, Patrick Legros, Andrew F. Newman, Raffaella Sadun and John Van Reenen
  • Format:Print
  • | Language:English
  • | Pages:68
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Abstract

We develop an incomplete-contracts model to jointly study firm boundaries and the allocation of decision rights within them. Integration has an option value: it gives firm owners authority to delegate or centralize decision rights, depending on who can best solve problems that may arise in the course of course of an uncertain production process. To examine the evidence, we construct measures of vertical integration and delegation for thousands of firms in different countries and industries. In line with the model’s predictions, we find that input value and supplier uncertainty play a key role in shaping both integration and delegation choices.

Keywords

Delegation; Real Options; Supply Assurance; Vertical Integration; Decision Choices and Conditions; Boundaries

Citation

Alfaro, Laura, Nick Bloom, Paola Conconi, Harald Fadinger, Patrick Legros, Andrew F. Newman, Raffaella Sadun, and John Van Reenen. "Come Together: Firm Boundaries and Delegation." Harvard Business School Working Paper, No. 18-051, December 2017. (Revised October 2020.)
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About The Authors

Laura Alfaro

General Management
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Raffaella Sadun

Strategy
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More from the Authors
  • The C-Suite Skills That Matter Most By: Raffaella Sadun, Joseph B. Fuller, Stephen Hansen and PJ Neal
  • Multitasking While Driving: A Time Use Study of Commuting Knowledge Workers to Assess Current and Future Uses By: Thomaz Teodorovicz, Andrew L. Kun, Raffaella Sadun and Orit Shaer
  • Distributional Consequences of Monetary Policy Across Races: Evidence from the U.S. Credit Register By: Laura Alfaro, Ester Faia and Camelia Minoiu
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