On the Grouping of Tasks into Firms: Make-or-Buy with Interdependent Parts


  • An early version of this paper was entitled “The Design of Industry.” A coeditor and an anonymous referee made very helpful comments. In addition, we are indebted to seminar participants at Berkeley, Harvard, MIT, NYU, Toronto, the 2006 IIOC, and the 2007 AEA meetings, as well as George Baker, Ken Corts, Mercedes Delgado Garcia, Bob Gibbons, Oliver Hart, Tom Hubbard, Whitney Newey, Jim Orlin, Roberto Rigobon, Duncan Simester, Eric Van den Steen, Tom Stoker, Dan Whitney, Dennis Yao, Florian Zettelmeyer, and Ezra Zuckerman. Dmitri Byzalov, Chris Ruggerio, and especially Carol Meyers provided excellent research assistance. Of course, the usual disclaimer applies.


We study the division of labor within production systems and look for the optimal grouping of tasks into firms. Using a unique dataset on the global automobile industry, we present evidence consistent with the prediction that pairs of tasks requiring more frequent mutual adaptation are more likely to be performed by the same firm. By taking account of interdependencies between tasks, our econometric approach generalizes standard make-or-buy analysis and yields improvements in predictive accuracy.