Come together

Little is known theoretically, and even less empirically, about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model where firms choose which suppliers to integrate and whether to delegate decisions to integrated suppliers or keep them centralized. We test the predictions of this model using a novel dataset that combines measures of vertical integration and delegation for a large set of firms operating in many countries and industries. In line with the model's predictions, we find that integration and delegation covary positively, and that producers are more likely to integrate suppliers in input sectors with greater productivity variation.