Vertical Integration and Information Technology Investment in the Insurance Industry

In this paper, we examine whether frictions created by differences in firm boundaries affect the speed with which firms adopt new Information Technology. Using a rich dataset on organizational characteristics and Internet investment by over 100 firms in the insurance industry, we show that vertical integration in distribution has a significant impact on the speed with which insurers adopt consumer 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. Furthermore, vertical integration has no affect on the adoption of Internet technologies, such as basic access, that are not used in distribution. 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.

[1]  Calvin H. Brainard,et al.  Competition, Regulation, and the Public Interest in Nonlife Insurance , 1964 .

[2]  Ryan Bernard.  The Corporate Intranet: Create and Manage an Internal Web for Your Organization , 1996 .

[3]  Sanjeev Dewan,et al.  Firm Characteristics and Investments in Information Technology: Scale and Scope Effects , 1998, Inf. Syst. Res..

[4]  Paolo Leon.  The Economic Institutions of Capitalism , 1986, The Antitrust Bulletin.

[5]  A. Adam.  Whatever happened to information systems ethics? Caught between the devil and the deep blue sea , 2004 .

[6]  Laureen Regan.  Vertical Integration in the Property-Liability Insurance Industry: A Transaction Cost Approach , 1997 .

[7]  Sanford J. Grossman,et al.  The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration , 1986 .

[8]  Agency Cost, Firm Size, and Exclusive Dealing , 1989, The Journal of Law and Economics.

[9]  P. T. Spiller,et al.  Strategyand Transaction Costs: The Organizationofdistributioninthecarbonatedsoftdrinkindustry , 1992 .

[10]  Joan V. Robinson,et al.  The Nature of the Firm , 2004 .

[11]  Abdullah Yavas,et al.  A Search Model of Marketing Systems in Property-Liability Insurance , 1998 .

[12]  K. Stiroh.  Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say? , 2001 .

[13]  Robert H. Gertner,et al.  Vertical Integration and Internet Strategies in the Apparel Industry , 2003 .

[14]  Paul L. Joskow,et al.  Cartels, Competition and Regulation in the Property-Liability Insurance Industry , 1973 .

[15]  Ginger Zhe Jin,et al.  Reputational Incentives for Restaurant Hygiene , 2009 .

[16]  Sendhil Mullainathan,et al.  Do Firm Boundaries Matter , 2001 .

[17]  Susan Helper,et al.  Supplier Relations and Adoption of New Technology: Results of Survey Research in the U.S. Auto Industry , 1995 .

[18]  O. Hart,et al.  Property Rights and the Nature of the Firm , 1988, Journal of Political Economy.

[19]  David C. Schmittlein,et al.  Integration of the sales force: an empirical examination , 1984 .

[20]  M. Pauly,et al.  Cost function estimation and quality bias: the regulated automobile insurance industry , 1986 .

[21]  Zur Shapira,et al.  Exclusive vs. independent agents: a separating equilibrium approach , 1999 .

[22]  E. Anderson.  Transaction costs as determinants of opportunism in integrated and independent sales forces , 1988 .

[23]  Larry L. Constantine,et al.  Back to the future , 2001, CACM.

[24]  Thomas Astebro,et al.  Noncapital Investment Costs and the Adoption of CAD and CNC in U.S. Metalworking Industries , 2002 .

[25]  Michael Etgar.  Cost Effectiveness in Insurance Distribution , 1977 .

[26]  Dazhong Wu,et al.  Competitive Environment and the Relationship Between IT and Vertical Integration , 2009, Inf. Syst. Res..

[27]  Paul Stoneman,et al.  Rank, Stock, Order And Epidemic Effects In The Diffusion Of New Process Technologies : An Empirical Model , 1990 .

[28]  Vijay Gurbaxani,et al.  Investigating the Risk-Return Relationship of Information Technology Investment: Firm-Level Empirical Analysis , 2007, Manag. Sci..

[29]  Carliss Y. Baldwin,et al.  Risky Business: The Impact of Property Rights on Investment and Revenue in the Film Industry , 2012 .

[30]  Tony Lancaster,et al.  The Econometric Analysis of Transition Data. , 1992 .

[31]  Dale W. Jorgenson,et al.  Information technology and the American growth resurgence , 2005 .

[32]  P. Joskow,et al.  Transaction Cost Economics, Antitrust Rules and Remedies , 2002 .

[33]  Jack M. Nelson,et al.  Do Independent Agent Insurers Provide Superior Service? the Insurance Marketing Puzzle , 1995 .

[34]  P. Joskow.  Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence , 1988 .

[35]  Avi Goldfarb,et al.  How did location affect adoption of the commercial Internet? Global village vs. urban leadership , 2005 .

[36]  W. Dugger.  The Economic Institutions of Capitalism , 1987 .

[37]  B. Douglas Bernheim,et al.  Exclusive Dealing , 1996, Journal of Political Economy.

[38]  Jack M. Nelson,et al.  Independent and Exclusive Agency Insurers: A Reexamination of the Cost Differential , 1992 .

[39]  Timothy H. Hannan,et al.  The Determinants of Technology Adoption: The Case of the Banking Firm , 1984 .

[40]  Clifford W. Smith,et al.  Ownership Structure across Lines of Property-Casualty Insurance , 1988, The Journal of Law and Economics.

[41]  Jack E. Triplett,et al.  ‘Baumol’s Disease’ has been Cured: IT and Multifactor Productivity in US Service Industries , 2006 .

[42]  Eric K. Clemons,et al.  The Internet and the Future of Financial Services: Transparency, Differential Pricing and Disintermediation , 2000 .

[43]  Allen N. Berger,et al.  The Coexistence of Multiple Distribution Systems for Financial Services: The Case of Property-Liability Insurance , 1997 .

[44]  G. Baker,et al.  Contractibility and Asset Ownership: On-Board Computers and Governance in U.S. Trucking , 2000 .

[45]  Sharon Tennyson,et al.  The coexistence of distribution systems under price search: Theory and some evidence from insurance , 1998 .

[46]  Michael D. Whinston,et al.  On the Transaction Cost Determinants of Vertical Integration , 2003 .

[47]  S. Masten.  Case Studies in Contracting and Organization , 1996 .

[48]  Chris Forman,et al.  The Corporate Digital Divide , 2002 .

[49]  Sharon Tennyson,et al.  Agent Discretion and the Choice of Insurance Marketing System , 1996, The Journal of Law and Economics.

[50]  Sarah J. Lane.  The Determinants of Investment in New Technology , 1991 .

[51]  Insurance company operations , 1981 .

[52]  O. Williamson,et al.  Markets and Hierarchies: Analysis and Antitrust Implications. , 1977 .

[53]  J. Heckman,et al.  Econometric duration analysis , 1984 .

[54]  Margaret E. Slade,et al.  Vertical integration and firm boundaries : the evidence , 2007 .

[55]  M. Dekimpe,et al.  The Market Valuation of Internet Channel Additions , 2002 .

[56]  H. Doerpinghaus.  An Analysis of Complaint Data in the Automobile Insurance Industry , 1991 .

[57]  T. Bresnahan,et al.  Technical Progress and Co-Invention in Computing and in the Use of Computers , 1996 .

[58]  Lorin M. Hitt,et al.  Information Technology and Firm Boundaries: Evidence from Panel Data , 1999, Inf. Syst. Res..