A theory of trust failure and vertical integration in industrial districts

We model the interaction of independent firms within an industrial district as a repeated game of trust, where cooperative outcomes are not due to the cultural attitudes of the players, but the result of non-cooperative behaviour taking place in a stable organizational setting. When the outside option of changing partners is not too attractive, cooperation may arise also without ties between firms; when such attractiveness increases, cooperation may only be guaranteed by making the relationship more stable through a formal commitment, which may lead to a fully-fledged vertical integration. As the efficiency gains of changing partners becomes even larger, stable relationships are no longer optimal and the traditional model of industrial districts breaks down.