Non-contractible investments and vertical integration in the Mexican footwear industry

This paper examines patterns of integration among manufacturers and retailers, using data from a survey of footwear manufacturers in Mexico. The property rights framework, developed in papers by Grossman and Hart [1986, J. Polit. Econ. 94: 691] and Hart and Moore [1990, J. Polit. Econ. 98: 1119], is differentiated from the standard empirical transactions cost framework. In the context of this industry, the most relevant distinction between the two frameworks is that the property rights framework addresses both the benefits and costs of integration, while the transactions cost framework focuses only on variation in the benefits of integration. We show that the costs of integration are highest where the retailer's non-contractible investment has an important effect on the overall profits from the relationship. Consistent with the property rights framework, the data suggest that integration is less likely in these circumstances. (C) 2002 Elsevier Science B.V. All rights reserved.