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International trade and the allocation of capital within firms

Author

Listed:
  • Sebastian Doerr

    (BIS - Bank for International Settlements)

  • Dalia Marin

    (TUM Technical University of Munich, CEPR - Center for Economic Policy Research)

  • Davide Suverato

    (ETH Zurich)

  • Thierry Verdier

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

This paper introduces an internal capital market into a two-factor model of multi-segment firms. It features empire building by managers and informational frictions within the organization. The headquarters knows less about a segment's true cost than its divisional managers do, so managers can over-report their costs and receive more capital than optimal. Our novel theory, which enables us to endogenize the cost structure of multi-segment firms, shows that international trade imposes discipline on divisional managers and improves the capital allocation between divisions, thereby lowering the conglomerate discount. The theory can explain why exporters exhibit a lower conglomerate discount than non-exporters. We exploit the China shock as an exogenous change to competition to confirm the model's predictions with data on US companies.

Suggested Citation

  • Sebastian Doerr & Dalia Marin & Davide Suverato & Thierry Verdier, 2025. "International trade and the allocation of capital within firms," Post-Print halshs-05033171, HAL.
    • Handle: RePEc:hal:journl:halshs-05033171
    DOI: 10.1016/j.jinteco.2024.104023
    as

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