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Contracting institutions and firm integration around the world

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  • Eppinger, Peter
  • Kukharskyy, Bohdan

Abstract

Firm integration is fundamentally shaped by contractual frictions. But do better contracting institutions, reducing these frictions, induce firms to be more or less deeply integrated? To address this question, this paper exploits unique micro data on ownership shares across more than 200,000 firm pairs worldwide, including domestic and cross-border ownership links. We uncover a new stylized fact: Firms choose higher ownership shares in subsidiaries located in countries with better contracting institutions. We develop a Property-Rights Theory of the multinational firm featuring partial ownership that rationalizes this pattern and guides our econometric analysis. The estimations demonstrate that better contracting institutions favor deeper integration, in particular in relationship-specific industries.

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  • Eppinger, Peter & Kukharskyy, Bohdan, 2021. "Contracting institutions and firm integration around the world," European Economic Review, Elsevier, vol. 137(C).
    • Handle: RePEc:eee:eecrev:v:137:y:2021:i:c:s0014292121001586
    DOI: 10.1016/j.euroecorev.2021.103815
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    Cited by:

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    2. Matthias Fauth & Benjamin Jung & Wilhelm Kohler, 2023. "German Firms in International Trade: Evidence from Recent Microdata," CESifo Working Paper Series 10523, CESifo.

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    More about this item

    Keywords

    Firm integration; Contracting institutions; Multinational firms; Property-Rights Theory; Ownership shares;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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