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Using the universe of large Canadian manufacturing firms in 1988 and 1996, the authors investigate to what extent outsourcing decision can be explained by a simple property rights model. The unique availability of disaggregate information on outputs as well as inputs permits the construction of a very detailed measure of vertical integration. The authors also construct five different measures of technological intensity to proxy for investments that are likely to be specific to a buyer-seller relationship. A theoretical model that allows for varying degrees of investment specificity and for complementarities - an externality between buyer and supplier investments - guides the analysis.
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