Trade Policy and Firm Boundaries

45 Pages Posted: 19 Jul 2010

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Paola Conconi

Centre for Economic Policy Research (CEPR); Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

Harald Fadinger

University of Vienna

Andrew F. Newman

Boston University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: June 2010

Abstract

We study how trade policy affects firms' ownership structures. We embed an incomplete 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.

Keywords: Firm Organization, Regional Trade Agreements, Tariffs

JEL Classification: D23, F13, F23

Suggested Citation

Alfaro, Laura and Conconi, Paola and Fadinger, Harald and Newman, Andrew F., Trade Policy and Firm Boundaries (June 2010). CEPR Discussion Paper No. DP7899, Available at SSRN: https://ssrn.com/abstract=1640976

Laura Alfaro (Contact Author)

Harvard University ( email )

Cambridge, MA 02138
United States

Paola Conconi

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
32 2 650 2345 (Phone)
32 2 650 4475 (Fax)

Harald Fadinger

University of Vienna ( email )

Bruenner Strasse 72
Vienna, Vienna 1090
Austria

Andrew F. Newman

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-358-4354 (Phone)
617-353-4143 (Fax)

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