International trade and the allocation of capital within firms

Sebastian Doerr, Dalia Marin, D. Suverato and T. Verdier

Journal of International Economics, 2025, vol. 153, issue C

Abstract: This paper introduces an internal capital market into a two-factor model of multi-segment firms. It features empire building by managers and informational frictions within the organization. The headquarters knows less about a segment’s true cost than its divisional managers do, so managers can over-report their costs and receive more capital than optimal. Our novel theory, which enables us to endogenize the cost structure of multi-segment firms, shows that international trade imposes discipline on divisional managers and improves the capital allocation between divisions, thereby lowering the conglomerate discount. The theory can explain why exporters exhibit a lower conglomerate discount than non-exporters. We exploit the China shock as an exogenous change to competition to confirm the model’s predictions with data on US companies.

Keywords: Multi-product firms; Trade and organization; Internal capital markets; Conglomerate discount; China shock (search for similar items in EconPapers)
JEL-codes: D23 F12 G30 L22 (search for similar items in EconPapers)
Date: 2025
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: International trade and the allocation of capital within firms (2025)
Working Paper: International trade and the allocation of capital within firms (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:153:y:2025:i:c:s0022199624001508

DOI: 10.1016/j.jinteco.2024.104023

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