Come Together: Firm Boundaries and Delegation

Abstract

Little is known about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which final good producers choose which suppliers to integrate and whether to delegate decisions to integrated suppliers, when they are ex-ante uncertain about their ability. In this setting, integration has an option value: ownership rights give producers authority to delegate or centralize production decisions, depending on the realized ability of suppliers. To assess the evidence, we construct measures of vertical integration and delegation for thousands of firms in many countries and industries. Consistent with the model, we find that (i) integration and delegation co-vary positively; (ii) firms delegate more decisions to integrated suppliers of more valuable inputs; and suppliers are more likely to be integrated if (iii) they produce more valuable inputs and (iv) operate in industries with greater productivity dispersion.

Managing risk in corporate groups: Limited liability, asset partitioning, and risk compartmentalization

“…They use a database of the construction industry and find that vertical integration and centralization of decision‐making are positively related, especially in more complex and uncertain environments where the need for coordination is arguably greater. Alfaro et al (2018) combine data from the WMS with a firm‐level integration index constructed from the WorldBase dataset and find instead that integration and centralization move in opposite directions. We add to this limited literature by emphasizing the role of the law in shaping firm boundaries and internal organization.…”

Corporate Culture as a Theory of the Firm

“…Specific works include Coase (1937), Cyert and March (1963), Williamson (1971), Alchian and Demsetz (1972), Grossman and Hart (1986), Hart and Moore (1990), Holmstrom and Milgrom (1994), DeMeza andLockwood (1998), andHolmstrom (1999). See also Cremér, Garicano, and Prat (2007) for a theory of firm scope and structure based on the specificity of technical languages, and Alfaro, Bloom, Conconi, Fadinger, Legros, Newman, Sadun, and Van Reenen (2019) for a recent contribution examining firm boundaries and delegation. There is also a vast literature on corporate culture.…”

The role of management practices in acquisitions and the FDI location decision

“…In the context of international trade, Bloom et al (2020) provide evidence that better‐managed firms are likely to export more products to more destinations. Alfaro et al (2018) analyze the role of delegation for company boundaries. They point out that the positive relationship between delegation and integration is mediated through management practices.…”