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 | 2019

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 about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which final good producers choose which suppliers to integrate and whether to delegate decisions to integrated suppliers, when they are ex-ante uncertain about their ability. In this setting, integration has an option value: ownership rights give producers authority to delegate or centralize production decisions, depending on the realized ability of suppliers. To assess the evidence, we construct measures of vertical integration and delegation for thousands of firms in many countries and industries. Consistent with the model, we find that (i) integration and delegation covary positively; (ii) firms delegate more decisions to integrated suppliers of more valuable inputs; and suppliers are more likely to be integrated if (iii) they produce more valuable inputs and (iv) operate in industries with greater productivity dispersion.

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

Language: English

Format: Print

73 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 2019.)

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Come Together: Firm Boundaries and Delegation

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