Arm's-Length Transactions as a Source of Incomplete Cross-Border Transmission: The Case of Autos

Rebecca Hellerstein () and Sofia Villas-Boas ()

No 1016, Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: A growing share of international trade occurs through intra-firm transactions between domestic and foreign subsidiaries of a multinational firm. The difficulties associated with writing and enforcing a vertical contract compound when a product must cross a national border, and may explain the high rate of multinational trade across such borders. We show that this common cross-border organization of the firm may have implications for the well-documented incomplete transmission of shocks across such borders. We present new evidence of a positive relationship between an industry's share of multinational trade and its rate of exchange-rate pass-through to prices. We then develop a structural econometric model with both manufacturers and retailers to quantify how firms' organization of their activities across national borders affects their pass-through of a foreign cost shock. We apply the model to data from the auto market. Counterfactual experiments show why cross-border transmission may be much higher for a multinational than for an arm's-length transaction. In the structural model, firms' pass-through of foreign cost shocks is on average 29 percentage points lower in arm's-length than in multinational transactions, as the higher markups from a double optimization along the distribution chain create more opportunity for markup adjustment following a shock. As arm's-length transactions account for about 60 percent of U.S. imports, this difference may explain roughly 20 percent of the incomplete transmission of foreign-cost shocks to the U.S. in the aggregate.

Keywords: Cross-border transmission; Multinationals; Arm's-length transactions; Real exchange rates; Exchange-rate pass-through; Vertical contracts; Autos (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2006-03-13
Note: oai:cdlib1:are_ucb-1112
View citations in EconPapers

Downloads: (external link)
http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1112&context=are_ucb (application/pdf)

Related works:
Working Paper: Arm's-length transactions as a source of incomplete cross-border transmission: the case of autos (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cdl:agrebk:1016

Access Statistics for this paper

More papers in Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley
Contact information at EDIRC.
Series data maintained by Christopher F. Baum ().