NBER WORKING PAPER SERIES VERTICAL INTEGRATION AND TECHNOLOGY: THEORY AND EVIDENCE Daron Acemoglu Philippe Aghion Rachel Griffith Fabrizio Zilibotti Working Paper 10997 http://www.nber.org/papers/w10997 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 December 2004 We thank Richard Blundell, Robert Gertner, Oliver Hart, Bengt Holmstron, Ali Hortacsu, Paul Joskow, Ariel Pakes, Helen Simpson, John Van Reenen, and seminar participants at Canadian Institute of Advanced Research, Chicago, Harvard, MIT, NBER, and the University of Stockholm for useful comments. Griffith was funded by the ESRC Centre for Microeconoic Analysis of Public Policy at the Institute for Fiscal Studies. This work contains statistical data from ONS which is Crown Copyright and reproduced with the permission of the controller of HMSO and Queen’s Printer for Scotland (see http://www.hmso.gov.uk/copyright/licenses/click-use-home.htm). The use of the ONS statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the statistical data. All errors and omissions remain the responsibility of the authors. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. © 2004 by Daron Acemoglu, Philippe Aghion, Rachel Griffith, and Fabrizio Zilibotti. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Vertical Integration and Technology: Theory and Evidence Daron Acemoglu, Philippe Aghion, Rachel Griffith, and Fabrizio Zilibotti NBER Working Paper No. 10997 December 2004 JEL No. L22, L23, L24, L60 ABSTRACT This paper investigates the determinants of vertical integration using data from the UK manufacturing sector. We find that the relationship between a downstream (producer) industry and an upstream (supplier) industry is more likely to be vertically integrated when the producing industry is more technology intensive and the supplying industry is less technology intensive. Moreover, both of these effects are stronger when the supplying industry accounts for a large fraction of the producer's costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation strategies, and with or without controlling for a number of firm and industry-level characteristics. They are consistent with the incomplete contract theories of the firm that emphasize both the potential costs and benefits of vertical integration in terms of investment incentives. Daron Acemoglu Rachel Griffith Department of Economics Institute for Fiscal Studies (IFS) MIT, E52-380B London 50 Memorial Drive [email protected] Cambridge, MA 02142-1347 and NBER Fabrizio Zilibotti [email protected] Institute for International Economic Studies Stockholm Philippe Aghion [email protected] Department of Economics University College London Gower Street London, WC1 6BT [email protected] QN ièïìêÖñÑïäêè mÇèö ÜôëÜìïî ÉÜçäÜóÜ ïâÇï ìÜÑÜèï ïÜÑâèêçêàäÑÇç ÖÜóÜçêëéÜèïî ÇèÖ àçêÉÇçäõÇïäêè ÇìÜ ïìÇèîM áêìéäèà ïâÜ äèïÜìèÇç êìàÇèäõÇïäêè êá ïâÜ <ìéN fäìîïL äï äî ÇìàñÜÖL èÜò ïÜÑâèêçêàäÜîL ÜîëÜM ÑäÇççö äèáêìéÇïäêè ïÜÑâèêçêàöL ÇìÜ ÑìÜÇïäèà Ç îâäáï áìêé ïâÜ êçÖ äèïÜàìÇïÜÖ <ìéî ïêòÇìÖî éêìÜ ÖÜçÇöÜìÜÖ êìàÇèäõÇïäêèî ÇèÖ êñïîêñìÑäèàNQ sÜÑêèÖL àçêÉÇçäõÇïäêè êáïÜè ÑìÜÇïÜî Ç ïÜèÖÜèÑö ïê ïìÇèîáÜì ÑÜìïÇäè çÇÉêìMäèïÜèîäóÜ ëÇìïî êá ïâÜ ëìêÖñÑïäêè ëìêÑÜîî ïê ÑêñèïìäÜî òäïâ çêòÜì òÇàÜîNR tâäìÖL äï äî êáïÜè éÇäèïÇäèÜÖ ïâÇï ïâÜ àìÜÇïÜì ÑêéëÜïäïäóÜ ëìÜîîñìÜî ÑìÜÇïÜÖ Éö Éêïâ àçêÉÇçäõÇïäêè ÇèÖ ÇÖóÇèÑÜî äè 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