American Economic Review 2014, 104(4): 1120–1148

Vertical Integration and Input Flows†
By Enghin Atalay, Ali Hortaçsu, and Chad Syverson*
We use broad-based yet detailed data from the economy’s goodsproducing
sectors to investigate firms’ ownership of production
chains. It does not appear that vertical ownership is primarily used
to facilitate transfers of goods along the production chain, as is often
presumed: roughly one-half of upstream establishments report no
shipments to downstream establishments within the same firm. We
propose an alternative explanation for vertical ownership, namely
that it promotes efficient intrafirm transfers of intangible inputs. We
show evidence consistent with this hypothesis, including the fact
that, after a change of ownership, an acquired establishment begins
to resemble the acquiring firm along multiple dimensions. (JEL G32,
G34, L14, L22, L60, M11)