The Network Contract

Abstract

This paper studies costs and benefits of firm networks, and related industrial policies, with a focus on the recently introduced in the Italian legislation. Incentives to networks creation could be useful to foster future mergers, but may prove ineffective as a substitute for firms' growth. The network contract is a comparatively more flexible instrument, but its potential is hindered by the indeterminacy of its contents: some standardization would be beneficial. The contract adds to a plethora of incentives that distort firms' choices. Members of a network contract have often a pre-established relationship, and are located in classical marshallian industrial districts. One novel aspect is that sometimes partner firms are located in faraway regions. Probit regressions show: i) the probability of entering a network contract increases with firm's size and growth; this shows that the network does not seem to be the solution to small size problems; ii) the degree of leverage does not discriminate between firms in networks and the others.