Come Together: Firm Boundaries and Delegation

Laura  Alfaro; Nick  Bloom; Paola  Conconi; Harald  Fadinger; Patrick  Legros; Andrew F. Newman; Raffaella  Sadun; John  Van Reenen

Working Paper | HBS Working Paper Series | 2018

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

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 covary 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.

Keywords: Vertical Integration; delegation; real options; supply assurance; Vertical Integration; Decision Choices and Conditions; Boundaries;

Language: English

Format: Print

59 pages

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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 May 2018.)

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Come Together: Firm Boundaries and Delegation

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