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BPEA Article

The Diversification of Production


MOST FIRMS TODAY produce more than one product. In this sense their
production is diversified, or horizontally integrated. This paper addresses
two questions. First, why have firms become more diversified
over the past century? And second, why are diversified firms more
oriented toward research and development (R&D) than nondiversified
I tackle these two questions under the assumption that a firm diversifies
to maximize its efficiency. Economists have often argued that a
firm reaps efficiency gains when it diversifies its production because
its managerial and R&D inputs can be shared among its various activities.



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