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Contracting institutions and firm integration around the world

Peter Eppinger () and Bohdan Kukharskyy

European Economic Review, 2021, vol. 137, issue C

Abstract: Firm integration is fundamentally shaped by contractual frictions. But do better contracting institutions, reducing these frictions, induce firms to be more or less deeply integrated? To address this question, this paper exploits unique micro data on ownership shares across more than 200,000 firm pairs worldwide, including domestic and cross-border ownership links. We uncover a new stylized fact: Firms choose higher ownership shares in subsidiaries located in countries with better contracting institutions. We develop a Property-Rights Theory of the multinational firm featuring partial ownership that rationalizes this pattern and guides our econometric analysis. The estimations demonstrate that better contracting institutions favor deeper integration, in particular in relationship-specific industries.

Keywords: Firm integration; Contracting institutions; Multinational firms; Property-Rights Theory; Ownership shares (search for similar items in EconPapers)
JEL-codes: D02 D23 F21 F23 L14 L23 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:137:y:2021:i:c:s0014292121001586

DOI: 10.1016/j.euroecorev.2021.103815

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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