Related-Party Trades in Vertical Integration

Abstract

Despite the importance of intra-firm trades in theories of the firm, an empirical literature using proxy measures has documented surprisingly little such trade. I revisit this conclusion using economy-wide firm-level data from South Korea, where related-party trades are directly observable. I show that the true prevalence and volume of the trades are much greater than previous measures indicate. Past proxy measures that rely heavily on input-output tables appear to dramatically underestimate the trades, capturing only 17.6% of related parties that trade and 32.6% of their sales volume. I propose alternative methods to infer trade within ownership networks that show substantially improved performances compared to the existing proxies.

Keywords: Related-party trade, intra-firm trade, vertical integration

JEL Classification: G32, G34, L22, L60, M11, C53