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Trade Policy and Firm Boundaries

  • Alfaro, Laura
  • Conconi, Paola
  • Fadinger, Harald
  • Newman, Andrew

We study how trade policy affects firms’ ownership structures. We embed an incom- plete contracts model of vertical integration choices into a standard perfectly-competitive international trade framework. Integration decisions are driven by a trade-off between the pecuniary benefits of coordinating production decisions and the managers’ private benefits of operating in preferred ways. The price of output is a crucial determinant of this choice, since it affects the size of the pecuniary benefits: higher prices lead to more integration. Because tariffs increase domestic product prices, this effect provides a novel theoretical channel through which trade policy can influence firm boundaries. We then examine the evidence, using a unique dataset to construct firm-level indexes of vertical integration for a large set of countries. In line with the predictions of our model, we obtain three main results. First, higher tariffs lead to higher levels of vertical integration. Second, differences in ownership structure across countries, measured by the difference in sectoral vertical integration indexes, are smaller in sectors with similar levels of protection. Finally, ownership structures are more alike among members of regional trade agreements.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7899.

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Date of creation: Jun 2010
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Handle: RePEc:cpr:ceprdp:7899
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  1. Antras, Pol, 2003. "Firms, Contracts, and Trade Structure," Scholarly Articles 3196328, Harvard University Department of Economics.
  2. Bombardini, Matilde, 2008. "Firm heterogeneity and lobby participation," Journal of International Economics, Elsevier, vol. 75(2), pages 329-348, July.
  3. Legros, Patrick & Newman, Andrew, 2000. "Competing for Ownership," CEPR Discussion Papers 2573, C.E.P.R. Discussion Papers.
  4. repec:hrv:faseco:4784029 is not listed on IDEAS
  5. Patrick Legros & Andrew F. Newman, 2013. "A Price Theory of Vertical and Lateral Integration," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 725-770.
  6. Harrison, Ann E. & Love, Inessa & McMillan, Margaret S., 2002. "Global capital flows and financing constraints," Policy Research Working Paper Series 2782, The World Bank.
  7. Holger Breinlich, 2006. "Trade Liberalization and Industrial Restructuring through Mergers and Acquisitions," Economics Discussion Papers 619, University of Essex, Department of Economics.
  8. Antras, Pol & Helpman, Elhanan, 2004. "Global Sourcing," Scholarly Articles 3196327, Harvard University Department of Economics.
  9. Christian Broda & Nuno Limao & David E. Weinstein, 2008. "Optimal Tariffs and Market Power: The Evidence," American Economic Review, American Economic Association, vol. 98(5), pages 2032-65, December.
  10. Antràs, Pol & Staiger, Robert, 2008. "Offshoring and the Role of Trade Agreements," CEPR Discussion Papers 6966, C.E.P.R. Discussion Papers.
  11. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 569-600, 05.
  12. Nick Bloom & Raffaella Sadun & John Van Reenen, 2010. "Does product market competition lead firms to decentralize?," LSE Research Online Documents on Economics 28615, London School of Economics and Political Science, LSE Library.
  13. Paola Conconi & Patrick Legros & Andrew Newman, 2012. "Trade Liberalization and Organizational Change," ULB Institutional Repository 2013/145500, ULB -- Universite Libre de Bruxelles.
  14. Pinelopi K. Goldberg & Nina Pavcnik, 2004. "Trade, Inequality, and Poverty: What Do We Know? Evidence from Recent Trade Liberalization Episodes in Developing Countries," NBER Working Papers 10593, National Bureau of Economic Research, Inc.
  15. Van den Steen, Eric, 2003. "Organizational Beliefs and Managerial Vision," Working papers 4224-01, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  16. Ludema, Rodney D & Mayda, Anna Maria, 2010. "Do terms-of-trade effects matter for trade agreements? Evidence from WTO countries," CEPR Discussion Papers 7695, C.E.P.R. Discussion Papers.
  17. Ornelas, Emanuel & Turner, John L., 2008. "Trade liberalization, outsourcing, and the hold-up problem," Journal of International Economics, Elsevier, vol. 74(1), pages 225-241, January.
  18. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, March.
  19. Paula Bustos, 2009. "Trade liberalization, exports and technology upgrading: Evidence on the impact of MERCOSUR on Argentinean firms," Economics Working Papers 1173, Department of Economics and Business, Universitat Pompeu Fabra.
  20. Christian Broda & Joshua Greenfield & David Weinstein, 2006. "From Groundnuts to Globalization: A Structural Estimate of Trade and Growth," NBER Working Papers 12512, National Bureau of Economic Research, Inc.
  21. Paola Conconi & Patrick Legros & Andrew F. Newman, 2008. "Trade Liberalization and Organizational Choice," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-172, Boston University - Department of Economics.
  22. repec:eca:wpaper:2008_025 is not listed on IDEAS
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