Outsourcing with labor management

A vertically integrated Labor Managed (LM) monopoly is compared to a decentralized market arrangement where production is segmented among an upward LM firm producing an input and a downstream LM manufacturer of the final good. Unlike what usually occurs among profit maximizing firms, the vertical arrangement with outsourcing is socially superior to the vertically integrated one. However, the upstream section has an incentive to outsource, while the downstream section would rather oppose it.