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| Author: | Sliwka, D. |
| Title: | Management incentives, signaling effects and the costs of vertical integration |
| Journal: | Zeitschrift für Betriebswirtschaft
2004 : JAN, VOL. 74:1, p. 27-52 |
| Index terms: | management incentives vertical integration costs signaling models |
| Language: | eng |
| Abstract: | This paper analyzes the costs of vertical integration (hereafter as: V-I.) within a game-theoretic signaling model. It is shown that a company - when vertically integrated (here as: int-gd.) with a supplier (as: sp.) - may decide to buy certain components from this sp. even at a lower quality than that offered by external sources. When the parent company decides to stop buying components from the int-gd. sp., the value of the ownership share (as: own-sh.) in the sp. is reduced. The loss in value of the own-sh. may outweigh the loss due to the lower quality. The anticipation of this effect leads to reduced ex-ante incentives (as: incs.) for the sp.'s management to raise quality. A spin-off may therefore be beneficial as it strengthens incs. Costs and benefits of V-I. are analyzed and consequences for vertically int-gd. companies organized in profit centers are discussed. |
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