Vertical integration, supplier behavior, and quality upgrading among exporters

Hansman, Christopher; Hjort, Jonas; León-Ciliotta, Gianmarco; Teachout, Matthieu

doi:http://dx.doi.org/10.1086/708818

Vertical integration, supplier behavior, and quality upgrading among exporters

Citation

Hansman C, Hjort J, León-Ciliotta G. Teachout M. Vertical integration, supplier behavior, and quality upgrading among exporters. J Polit Econ. 2020 Sep;128(9):3570-625. DOI: 10.1086/708818

Abstract

We study the relationship between firms’ output quality and organizational structure. Using data on the production and transaction chain that makes up Peruvian fish meal manufacturing, we 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, our 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.