Incomplete contracts and the boundaries of the multinational firm

• Published in: Journal of economic behavior & organization Vol. 94; pp. 330 - 344
• Main Authors: Nunn, Nathan, Trefler, Daniel
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.10.2013; Elsevier Sequoia S.A
• Subjects: Arms length transactions; Businesses; Contracts; Decision making; Economic behaviour; Empirical research; Experimental methods; Fixed-costs; Head offices; Imports; Incomplete contracts; Intra-firm trade; Multinational corporations; Multinational enterprises; Outsourcing; Productivity; Studies; U.S.A; US imports; Vertical integration; United States > US; Incomplete contracts; Intra-firm trade; F23; F14; Outsourcing; L33; L14; Fixed-costs; Vertical integration
• ISSN: 0167-2681; 1879-1751
• DOI: 10.1016/j.jebo.2012.10.004

Using data on U.S. intra-firm and arm's-length imports for 5705 products imported from 220 countries, we examine the determinants of the share of U.S. imports that are intra-firm. We examine two predictions that arise from Antràs (2003), Antràs and Helpman (2008) and Antràs and Helpman (2004). First, we find that, consistent with the implicit logic of Antràs (2003) and the explicit predictions of Antràs and Helpman (2008), vertical integration is increasing in the importance of non-contractible headquarter inputs relative to non-contractible supplier inputs. In other words, we show that only non-contractible headquarter inputs affect the firm's make-or-buy decision. Second, we also provide empirical support for the Antràs and Helpman (2004) prediction that intra-firm trade is largest where non-contractible headquarter inputs are important and productivity is high.