CDEP Faculty Affiliate Jonas Hjort has a paper forthcoming in the Journal of Political Economy titled "Vertical Integration, Supplier Behavior, and Quality Upgrading among Exporters" with Christopher Hansman, Gianmarco Leon, and Matthieu Teachout. They study the relationship between firms’ output quality and organizational structure. Using data on the production and transaction chain that makes up Peruvian fishmeal manufacturing, they establish three results. First, firms integrate suppliers when the quality premium rises for exogenous reasons. Second, suppliers change their behavior to better maintain input quality when vertically integrated. Third, firms produce a higher share of high-quality output when weather and supplier availability shocks shift them into using integrated suppliers. Overall, their results indicate that quality upgrading is an important motive for integrating suppliers facing a quantity-quality trade-off, as classical theories of the firm predict.
