DP12923 Come Together: Firm Boundaries and Delegation
We jointly study firm boundaries and the allocation of decision rights within them by
confronting an incomplete-contracts model with data on vertical integration and delegation
for thousands of firms around the world. Integration has an option value: it confers
authority to delegate or centralize decision rights, depending on who can best solve problems
that arise in the course of an uncertain production process. The model can explain
why more vertically integrated firms tend to delegate more, as observed in our data. In
line with the model’s predictions, we find that firms are more likely to integrate suppliers
that produce more valuable inputs and operate in industries with more dispersed productivity,
and that firms delegate more decisions to integrated suppliers that produce more
valuable inputs and operate in more productive industries.
