Macchiavello, Rocco
(2007)
Financial constraints, industry structure and firm's boundaries.
PhD thesis, London School of Economics and Political Science.
Abstract
The first part of this Thesis analyzes the impact of financial constraints (FC) on industrial structure. Chapter 1 presents a model that disentangles several effects of FC on entry, turnover, productivity and firms size distribution. The framework is applied in Chapter 2 which develops an industry equilibrium model of vertical integration under contractual imperfections with specific input suppliers and external investors. I assume that vertical integration economizes on the needs for contracts with specific input suppliers at the cost of higher financial requirements. I show that the two forms of contractual imperfections have different effects on the degree of vertical integration, and that contractual frictions with external investors affect vertical integration through two opposing channels: a direct negative, investment, effect and an indirect positive, entry, effect. Using cross-country- industry data, I present novel evidence on the institutional determinants of international differences in vertical integration which is consistent with the predictions of the theoretical model. In particular, I show' that countries with more developed financial systems are relatively more vertically integrated in industries that are dominated by large firms. The second part (Chapter 3) asks whether vertical integration reduces or increases transaction costs with external investors. I build a model in which a seller produces a good that can be used by a buyer, or sold on a spot market. The buyer and the seller have no cash, need to finance investments for production, and can not foresee in advance whether the input is most efficiently traded on the spot market or among each other. I assume that ownership of physical assets gives control over contracting rights to those assets, that financial streams get transferred with ownership and that returns can not be perfectly verified. The net balance of the costs and benefits of integration in terms of pledgeable income depends on the relative intensities of a positive "profits-pooling" effect against a negative "de-monitoring" effect. I find that larger projects, more specific assets, and low' investors protection are determinants of vertical integration. I discuss joint liability contracts between non integrated firms and how contractual externalities among investors favor integration.
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