Current theories of the vertical limits to firm size emphasise the consequences of opportunistic behaviour by managers. We introduce opportunistic wage setting by labour unions and trace the implications for profit and investment in specific assets. Although subcontracting to an independent supplier leaves the entrepreneur with a reduced share of the surplus, he is able to pass on the responsibility for making certain investments. Two significant results are that either subcontracting or vertical integration may be privately preferred yet socially inefficient; and there is no straightforward relationship between organisational choice and specific capital intensity.