From Flexibility to Insecurity: How Vertical Separation Amplifies Firm-level Uncertainty - HEC Paris - École des hautes études commerciales de Paris Access content directly
Journal Articles Journal of the European Economic Association Year : 2007

From Flexibility to Insecurity: How Vertical Separation Amplifies Firm-level Uncertainty

Abstract

This article presents a model where firms may endogenously externalize part of their production process. We start from the premise that adaptation to uncertainty cannot be contracted upon in the worker/employer relationship. Vertical separation then balances flexibility gains against hold-up costs of opportunistic behavior by outside contractors. In equilibrium, the degree of separation is shown to depend on the degree of product market competition, contractor's bargaining power, and the volatility of demand shocks. Our main result is that an increase in the degree of vertical separation amplifies the elasticity to demand shocks of firms' sales and employment. It does not, however, amplify aggregate uncertainty. Evidence from firm-level data is shown to be largely consistent with the main implications of our theory.

Domains

Dates and versions

hal-00461100 , version 1 (03-03-2010)

Identifiers

Cite

Mathias Thoenig, David Thesmar. From Flexibility to Insecurity: How Vertical Separation Amplifies Firm-level Uncertainty. Journal of the European Economic Association, 2007, Vol.5,n°6, pp.1161-1202. ⟨10.1162/JEEA.2007.5.6.1161⟩. ⟨hal-00461100⟩

Collections

HEC CNRS
76 View
0 Download

Altmetric

Share

Gmail Facebook X LinkedIn More