Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development

This paper examines the impact of contracting complementarity across product development systems in the automobile industry. While most empirical research on contracting assumes that each governance choice is independent of each other, cross-system integration and incentive problems within product development suggest the potential for complementarities across contracting choices within the firm. This paper develops and implements an instrumental variables estimator which allows us to distinguish contracting complementarity from firm-level fixed effects in governance choice. Taking advantage of system-level determinants of vertical integration to calculate instruments for system-to-system contracting complementarity, we establish three findings. First, contracting choices are