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Firms, Contracts, and Trade Structure

  • Antras, Pol

Roughly one-third of world trade is intrafirm trade. This paper starts by unveiling two systematic patterns in the volume of intrafirm trade. In a panel of industries, the share of intrafirm imports in total U. S. imports is significantly higher, the higher the capital intensity of the exporting industry. In a cross section of countries the share of intrafirm imports in total U. S. imports is significantly higher, the higher the capital-labor ratio of the exporting country. I then show that these patterns can be rationalized in a theoretical framework that combines a Grossman-Hart-Moore view of the firm with a Helpman-Krugman view of international trade. In particular, I develop an incomplete-contracting, property-rights model of the boundaries of the firm, which I then incorporate into a standard trade model with imperfect competition and product differentiation. The model pins down the boundaries of multinational firms as well as the international location of production, and it is shown to predict the patterns of intrafirm trade identified above. Econometric evidence reveals that the model is consistent with other qualitative and quantitative features of the data.

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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3196328.

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Date of creation: 2003
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Publication status: Published in Quarterly Journal of Economics
Handle: RePEc:hrv:faseco:3196328
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  1. Aghion, P. & Dewatripont, M. & Rey, P., 1990. "On renegotiation design," European Economic Review, Elsevier, vol. 34(2-3), pages 322-329, May.
  2. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  3. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  4. Marin, Dalia & Verdier, Thierry, 2006. "Power Inside the Firm and the Market: A General Equilibrium Approach," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 109, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  5. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
  6. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  7. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
  9. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1994. "Renegotiation design with unverifiable information," ULB Institutional Repository 2013/9591, ULB -- Universite Libre de Bruxelles.
  10. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  11. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, March.
  12. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-44, September.
  13. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September.
  14. Gene Grossman & Elhanan Helpman, 2001. "Integration vs. Outsourcing in Industry Equilibrium," CESifo Working Paper Series 460, CESifo Group Munich.
  15. John Romalis, 2004. "Factor Proportions and the Structure of Commodity Trade," American Economic Review, American Economic Association, vol. 94(1), pages 67-97, March.
  16. Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
  17. James R. Markusen & Keith E. Maskus, 2001. "General-Equilibrium Approaches to the Multinational Firm: A Review of Theory and Evidence," NBER Working Papers 8334, National Bureau of Economic Research, Inc.
  18. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy?," Harvard Institute of Economic Research Working Papers 1966, Harvard - Institute of Economic Research.
  19. Aoki, Masahiko, 1990. "Toward an Economic Model of the Japanese Firm," Journal of Economic Literature, American Economic Association, vol. 28(1), pages 1-27, March.
  20. John McLaren, 2000. ""Globalization" and Vertical Structure," American Economic Review, American Economic Association, vol. 90(5), pages 1239-1254, December.
  21. Ethier, Wilfred J, 1986. "The Multinational Firm," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 805-33, November.
  22. Ethier, W.J. & Markusen, J.R., 1993. "Multinational Firms, Technology Diffusion and Trade," ISER Discussion Paper 0303, Institute of Social and Economic Research, Osaka University.
  23. Cohen, Wesley M & Klepper, Steven, 1992. "The Anatomy of Industry R&D Intensity Distributions," American Economic Review, American Economic Association, vol. 82(4), pages 773-99, September.
  24. Kevin H. Zhang & James R. Markusen, 1997. "Vertical Multinationals and Host-Country Characteristics," NBER Working Papers 6203, National Bureau of Economic Research, Inc.
  25. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
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