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Determinants of Vertical Integration: Financial Development and Contracting Costs

Authors

  • DARON ACEMOGLU,

  • SIMON JOHNSON,

  • TODD MITTON

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    • Acemoglu and Johnson are at MIT, and Mitton is at Brigham Young University. We acknowledge the helpful comments of John McMillan, Rob Stambaugh, and an anonymous referee. We thank David Autor, Joseph Fan, and Nathan Nunn for providing data. We are particularly grateful to Jacques Crémer and Jianye Yan for pointing out an error in an earlier version of the paper. Acemoglu gratefully acknowledges financial support from the National Science Foundation.


ABSTRACT

We study the determinants of vertical integration in a new data set of over 750,000 firms from 93 countries. We present a number of theoretical predictions on the interactions between financial development, contracting costs, and the extent of vertical integration. Consistent with these predictions, contracting costs and financial development by themselves appear to have no effect on vertical integration. However, we find greater vertical integration in countries that have both greater contracting costs and greater financial development. We also show that countries with greater contracting costs are more vertically integrated in more capital-intensive industries.

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