Clive bull 1987 klein and murphy 1997 74 with those

Clive Bull 1987; Klein and Murphy 1997).
74
With those dynamic models, interaction,
whether it be in a firm or a market, is modeled
677 Lafontaine and Slade: Vertical Integration and Firm Boundaries
74
Other models, such as the PR model of Grossman
and Hart (1986) and Birger Wernerfelt’s (1997) adjust-
ment-cost model are dynamic in that they involve sequen-
tial actions. However, they do not involve the threat of
punishment to sustain cooperation.

as a repeated game with spot transactions
(again in a firm or market) as the punishment
for reneging. This is clearly a fruitful area for
future empirical research that has remained
relatively unexplored.
75
Other important areas that are ripe for
empirical assessment include the relation-
ship between vertical integration and devel-
opment, particularly the development of the
institutions that make contracting a feasible
alternative (see, e.g., John McMillan and
Woodruff 1999 and Acemoglu, Simon
Johnson, and Todd Mitton 2007), and the
relationship between vertical integration and
trade (see, e.g., Pol Antras 2003).
Fourth, we have tried to provide simple
versions of the theoretical models that
underlie the material that we cover in order
to derive predictions around which we could
organize the findings. Of course, by defini-
tion, those simple models neglect many
important issues and extensions. For exam-
ple, our moral-hazard model does not con-
sider the rich set of tools that can be used to
provide incentives inside firms, the transac-
tion-cost model glosses over the hold-up
problems that can occur within firms, and
the property-rights model does not explain
why firms, rather than individuals, own
assets.
76
A further limitation is that the theo-
ries, at least as we have presented them, are
more applicable to the entrepreneurial firm.
In particular, we have modeled the manufac-
turer as both decisionmaker and asset
owner. This means that we have not consid-
ered the important conflicts that can occur
between managers and shareholders in the
modern corporation—problems that result
from divorce of ownership and control.
77
It
is therefore perhaps surprising that, as we
have seen, the models’ predictive powers are
so high.
Finally, we have partitioned the theories
that we discuss into distinct groups, which
we have called moral-hazard, transaction-
cost, property-rights, and market-power
arguments, and we have used that partition-
ing to organize the evidence. The partition
that we chose, however, is somewhat arbi-
trary, and it is often difficult to fit empirical
studies into neat nonoverlapping classes. As a
result, there are a number of instances where
we have included a single study in more than
one pigeonhole and, in other instances, we
have not included studies in pigeonholes that
the authors might find appropriate. We use
the study by Baker and Hubbard (2003)
to illustrate the difficulties involved in
categorizing. In their setting—for-hire
trucking—relationship specific assets are not
particularly important, whereas incentives
and job design are. In that sense, therefore,
their study fits into the moral-hazard, particu-