Vertical Integration, Supplier Behavior, and Quality Upgrading Among Exporters

Authors: Christopher Hansman, Jonas Hjort, Gianmarco León-Ciliotta and Matthieu Teachout

Journal of Political Economy, Vol. 128, No 9, 3570-3625, September, 2020

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.

This paper originally appeared as Barcelona GSE Working Paper 961