New Survey Paper on Vertical Integration

21 September 2007 at 3:27 pm Peter G. Klein 2 comments

| Peter Klein |

Francine Lafontaine and Margaret Slade’s superb review paper on vertical integration, “Vertical Integration and Firm Boundaries: The Evidence,” appears in the current issue of the Journal of Economic Literature. (Non-gated version here.) Unlike previous reviews focusing on particular theoretical frameworks (e.g., my NIE Handbook paper on the transaction-cost approach), Lafontaine and Slade consider a broad range of factors potentially affecting vertical integration such as risk, agent effort, firm size, monitoring costs, and repeated interaction as well as the usual transaction-cost variables (asset specificity and uncertainty). They also look closely, following Whinston (2003), at distinctions between the transaction-cost (Williamson) and property-rights (Grossman-Hart-Moore) approaches. Here’s the abstract:

Since Ronald H. Coase’s (1937) seminal paper, a rich set of theories has been developed that deal with firm boundaries in vertical or input–output structures. In the last twenty-five years, empirical evidence that can shed light on those theories also has been accumulating. We review the findings of empirical studies that have addressed two main interrelated questions: First, what types of transactions are best brought within the firm and, second, what are the consequences of vertical integration decisions for economic outcomes such as prices, quantities, investment, and profits. Throughout, we highlight areas of potential cross-fertilization and promising areas for future work.

Also recommended, from the same issue of the JEL, is Bentley MacLeod’s “Reputations, Relationships, and Contract Enforcement.”

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2 Comments Add your own

1. Paolo MARITI | 24 September 2007 at 11:58 am

Surprisingly in this paper there is no word about Stigler,s theory of integration (1951, republished in 1968) and on the empirical work about it published mostly in the JIE .
It all could well be passed unnoticed were it not for the fact that in a very recent published interview Coase endorsed that theory as strictly complementary to his for understanding why and which activities are divided up among firms.
2. Peter Klein | 24 September 2007 at 12:23 pm

Former O&M guest blogger Dick Langlois has also done important work on a capabilities theory of vertical coordination that has some similarity to Stigler’s. See his Vanishing Hand project.