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Organizational Industrial Organization Around the World

Paper Session

Saturday, Jan. 7, 2017 5:30 PM – 7:15 PM

Sheraton Grand Chicago, Ohio
Hosted By: Industrial Organization Society
  • Chair: Laura Alfaro, Harvard Business School

All Together Now: Integration, Delegation, and Management

Laura Alfaro
,
Harvard Business School
Nicholas Bloom
,
Stanford University
Paola Conconi
,
European Center for Advanced Research in Economics and Statistics (ECARES)
Harald Fadinger
,
University of Mannheim
Andrew F. Newman
,
Boston University
Patrick Legros
,
ECARES and Northeastern University
Raffaella Sadun
,
Harvard Business School
John Van Reenen
,
Massachusetts Institute of Technology

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. Thus, 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.

Vertical Integration and Relational Contracts: Evidence from the Costa Rican Coffee Chain

Rocco Macchiavello
,
London School of Economics
Josepa Miquel-Florensa
,
Toulouse School of Economics

Abstract

When contracts are incomplete, market trade might be substituted by relational contracts or integration. This paper compares vertical integration and relational contracts between coffee mills and buyers in Costa Rica. Detailed data on transactions between and within firms reveal that integrated trade is shielded from demand uncertainty, a key force shaping market transactions. Relational contracts between firms display trading patterns qualitatively similar to those within integrated chains but do not achieve the same degree of market assurance. Integration, however, comes at the cost of worse relationships with independent suppliers. The evidence strongly supports models in which firms' boundaries alter temptations to renege on relational contracts and, consequently, the allocation of resources. Policy implications for export-oriented agricultural chains in developing countries are discussed.

Digging Deep to Compete: Vertical Integration, Product Market Competition and Prices

Danny McGowan
,
University of Nottingham

Abstract

This article establishes a causal effect of product market competition on vertical integration. The identfication strategy exploits a natural experiment in the US coal mining industry. Railroad deregulation caused an increase in product market competition among eastern but not observationally similar western mines. Using difference-in-difference estimations I find that following the increase in product market competition the incidence of vertical integration fell by 33% within the treatment group. This stems from falling market prices. The results illustrate how firms redesign their organizational structure in response to changes in their environment. I discuss several possible interpretations of these changes.

Branch Location Strategies and Financial Service Access in Thai Banking

Marc Rysman
,
Boston University
Robert M. Townsend
,
Massachusetts Institute of Technology
Christoph Walsh
,
Boston University

Abstract

The location of bank branches is an important determinant of access to financial services, particularly in developing countries. We study the location strategies of banks in Thailand since the 1990s. Thailand underwent a series of policy reforms in this area, as well as a large financial crisis, which substantially affected location strategies. We estimate a dynamic structural model of oligopolistic location choice, allowing for complementarity in payoffs for banks in nearby locations. We also measure the relationship between bank locations and measures of financial access. We consider the impact of counterfactual policy regimes on both bank locations and the resulting financial access.
Discussant(s)
Michael Powell
,
Northwestern University
Robert Gibbons
,
Massachusetts Institute of Technology
Silke Januszewski Forbes
,
Case Western Reserve University
Gordon Phillips
,
Dartmouth College
JEL Classifications
  • L2 - Firm Objectives, Organization, and Behavior
  • O1 - Economic Development