(job market paper)
Abstract. A large portion of world trade happens within firms’ boundaries. This paper proposes a new
general equilibrium framework where firms decide whether to outsource to unaffiliated suppliers
or to integrate input manufacturing. Multinational corporations and intrafirm trade arise endogenously
when firms integrate production in foreign countries. Outsourcing allows to benefit
from suppliers’ good technologies, but entails the cost of a mark-up price. Intrafirm sourcing
allows to save on mark-ups and to match a firm’s productivity with possibly lower foreign wages.
The pricing implications of the theory unveil a positive relationship between the intrafirm share
of imports and the degree of differentiation across inputs in a sector, for which I find strong support
in the data. Moreover, imperfect competition establishes a link between FDI liberalization
and optimal pricing: suppliers find optimal to reduce their prices in response to the possibility
of insourced production (the “pro-competition effect” of multinationals). The model is calibrated to match
aggregate U.S. trade data, and used to quantify the gains arising from vertical multinational
production and intrafirm trade. The computed gains are currently about 1% of consumption per
capita, and the model shows that further liberalization can increase them substantially.
Stefania Garetto
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Contact Info:
Department of Economics
1126 East 59th St.
Chicago IL 60637
garettos@uchicago.edu
I will be visiting Princeton University from September 2008 to July 2009, when I will join the faculty of the Department of Economics at Boston University.
Last Updated: 04/29/2008 - © 2008 Stefania Garetto