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Come together: firm boundaries and delegation

May 2018
Working Paper
18-019
By  Laura Alfaro, Patrick Legros, Nicholas Bloom, Andrew Newman, Paola Conconi, Raffaella Sadun, Harald Fadinger, John Van Reenan
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 co-vary 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.