Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development / Sharon Novak, Scott Stern.

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Novak, Sharon

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w13232.Publication details: Cambridge, Mass. National Bureau of Economic Research 2007.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper examines complementarity among vertical integration decisions in automobile product development. Though most research assumes that contracting choices are independent of each other, contracting complementarity arises when the returns to a single vertical integration decision are increasing in the level of vertical integration associated with other contracting choices. First, effective coordination may depend on the level of (non-contractible) effort on the part of each agent; contracting complementarity results if coordination efforts are interdependent and vertical integration facilitates a higher level of non-contractible effort. Second, effective coordination may require the disclosure of proprietary trade secrets, and the potential for expropriation by external suppliers may induce complementarity among vertical integration choices. We provide evidence for complementarity in product development contracting by taking advantage of a detailed dataset that includes the level of vertical integration and the contracting environment for individual automobile systems in the luxury automobile segment. Using an instrumental variables framework that distinguishes complementarity from unobserved firm-level factors, the evidence is consistent with the hypothesis that contracting complementarity is an important driver of vertical integration choices. The findings suggest that contracting complementarity may be particularly important when coordination is important to achieve but difficult to monitor.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w13232 (Browse shelf(Opens below))	Not For Loan

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July 2007.

This paper examines complementarity among vertical integration decisions in automobile product development. Though most research assumes that contracting choices are independent of each other, contracting complementarity arises when the returns to a single vertical integration decision are increasing in the level of vertical integration associated with other contracting choices. First, effective coordination may depend on the level of (non-contractible) effort on the part of each agent; contracting complementarity results if coordination efforts are interdependent and vertical integration facilitates a higher level of non-contractible effort. Second, effective coordination may require the disclosure of proprietary trade secrets, and the potential for expropriation by external suppliers may induce complementarity among vertical integration choices. We provide evidence for complementarity in product development contracting by taking advantage of a detailed dataset that includes the level of vertical integration and the contracting environment for individual automobile systems in the luxury automobile segment. Using an instrumental variables framework that distinguishes complementarity from unobserved firm-level factors, the evidence is consistent with the hypothesis that contracting complementarity is an important driver of vertical integration choices. The findings suggest that contracting complementarity may be particularly important when coordination is important to achieve but difficult to monitor.