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Cover of: Divided we Stand, United we Fall: Asset Specificity and Vertical Integration Reconsidered
Christian A. Ruzzier

Divided we Stand, United we Fall: Asset Specificity and Vertical Integration Reconsidered

Section: Articles
Volume 168 (2012) / Issue 4, pp. 658-686 (29)
Published 09.07.2018
DOI 10.1628/093245612804469836
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  • 10.1628/093245612804469836
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Summary
Recent surveys and casual observation suggest that higher levels of asset specificity need not always lead to vertical integration, as traditionally stressed by transaction-cost economics. This paper uncovers some of the factors driving firms to (sometimes) choose to remain separated in the presence of high specificity. It shows that in a world where outside options matter and investments are multidimensional, high asset specificity can foster nonintegration: a low level of specificity provides the most misdirected incentives when transacting in a market (because the outside option of external trade becomes so tempting), thus making a stronger case for nonintegration.