Airing Your Dirty Laundry: Vertical Integration, Reputational Capital, and Social Networks

This article explores the relationship between an ethnic-based social network and vertical integration decisions in the laundry services industry. We find that stores in the social network are significantly less likely to vertically integrate than nonmember stores. This has three primary implications. First, the social network may be lowering the costs of using the market more than facilitating in-house production. This implies better outsourcing opportunities in a social network and may explain a documented relationship between social networks and firm economic performance. Second, institutional details of our example and the estimated relationship suggest a role for opportunism and reputation as determinants of the boundaries of the firm in a setting without asset specificity. Finally, although we provide evidence that better access to credit can increase the likelihood of vertical integration, we show that better outsourcing opportunities have a dominant effect of the social network in this particular setting. The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.