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Causes of Subcontracting: Evidence from Panel Data on Construction Firms**

Manuel GONZÁLEZ University of Oviedo Dept. of Business Avda. del Cristo, S/n 33071 Oviedo SPAIN mgdiaz@econo.uniovi.es Benito ARRUÑADA Pompeu Fabra University Dept. of Economics and Business C/ Ramón Trías Fargas, 25 08005 Barcelona SPAIN benito.arrunada@econ.upf.es

Alberto FERNÁNDEZ Pompeu Fabra University Dept. ofEconomics and Business C/ Ramón Trías Fargas, 25 08005 Barcelona SPAIN alberto.fernandez@econ.upf.es

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Financial support from DGESIC, a research agency of the Spanish Government, through project PB950989 is gratefully acknowledged. Earlier versions of this paper have been presented at several seminars and conferences. We thank all the participants at these meetings and workshops, as well asAntonio Álvarez, Carlos Arias, Marta Fernández, Elena Huergo, Pere Ibern, Scott Masten, Albert Satorra, Frank Stephen and Luis Vázquez for helpful comments. All remaining errors are of course ours.

Electronic copy available at: http://ssrn.com/abstract=224551

Causes of Subcontracting: Evidence from Panel Data on Construction Firms

Abstract This paper examines factors explainingsubcontracting decisions in the construction industry. Rather than the more common cross-sectional analyses, we use panel data to evaluate the influence of all relevant variables. We design and use a new index of the closeness to small numbers situations to estimate the extent of hold-up problems. Results show that as specificity grows, firms tend to subcontract less. The opposite happens when outputheterogeneity and the use of intangible assets and capabilities increase. Neither temporary shortage of capacity nor geographical dispersion of activities seem to affect the extent of subcontracting. Finally, proxies for uncertainty do not show any clear effect.

JEL codes: L22, L14, L74

Keywords: Intangible assets, monitoring costs, specificity, subcontracting, vertical integration, uncertainty.Electronic copy available at: http://ssrn.com/abstract=224551

Causes of Subcontracting: Evidence from Panel Data on Construction Firms
1. Introduction

We test the vertical integration hypotheses of contractual literature on a representative panel of construction firms from 1987 to 1992.1 Our research provides two main improvements over most previous empirical work on make-or-buydecisions from a transaction costs perspective.2 First, we calculate asset specificity for each firm using a new index that does not depend on managerial assessments. Second, we use panel data to estimate time and firm-specific effects in subcontracting. Empirical work on transaction costs is largely cross-sectional in nature and, as a result, researchers have been unable to control for unobservedfirm-specific effects.3 The only exception is franchising, where some empirical work with panel data has been done.4 The rest of the paper is organized as follows. Section 2 develops general hypotheses on the subcontracting decision. Section 3 analyzes the main distinctive characteristics of the construction industry and outlines a theory of construction firms. Section 4 describes the data andmethodology and goes on to discuss the results. The paper ends with some

1

Besides Coase’s (1937) seminal work, classical works about vertical integration are Williamson (1971 and 1975), Klein, Crawford and Alchian (1978), Grossman and Hart (1986), Hart and Moore (1990), Klein (1996), Klein and Murphy (1997) and Poppo and Zenger (1998), among others.
2

Williamson (1985, pp. 103-30), Joskow(1988) and Shelanski and Klein (1995) review the main empirical works about transaction costs. Furthermore, many of the empirical works only use models of qualitative choice. See, for example, Monteverde and Teece (1982), Masten (1984), Anderson and Schmittlein (1984), Walker and Weber (1984 and 1987), Anderson (1985), Masten, Meehan and Snyder (1989), Lieberman (1991) and Masten and Snyder (1993)....