VerticalIntegrationandInformationTechnologyInvestmentin.pdfVIP

Journal of Law, Economics, and Organization Advance Access published September 7, 2009 JLEO 1 Vertical Integration and Information Technology Investment in the Insurance Industry Chris Forman* Georgia Institute of Technology Anne Gron NERA Economic Consulting In this paper, we examine whether frictions created by differences in ?rm bound- aries affect the speed with which ?rms adopt new Information Technology. Us- ing a rich dataset on organizational characteristics and Internet investment by over 100 ?rms in the insurance industry, we show that vertical integration in dis- tribution has a signi?cant impact on the speed with which insurers adopt con- sumer Internet applications that complement the existing distribution relationship. Vertical integration, however, has no effect on the adoption of tools that enable electronic communication between an insurer and its sales force. Fur- thermore, vertical integration has no affect on the adoption of Internet technolo- gies, such as basic access, that are not used in distribution. (JEL D23, L14, M15) 1. Introduction A considerable body of analytical and theoretical work examines the determi- nants of ?rm boundaries. Yet, relatively less is known about the implications of vertical integration for ?rm performance (Lafontaine and Slade 2007).1 In par- ticular, one issue not widely explored is the ways in which downstream, or forward, vertical integration affect how ?rms respond to new technologies. For example, one particular vertical structure may have higher costs that