Organizational Boundaries, Transfer Prices and Export Prices of International Firms-Theories and Firm-Level Evidence

Ma, Xiangjun, Department of Economics, University of Virginia
Harrigan, James, Department of Economics, University of Virginia
McLaren, John, Department of Economics, University of Virginia
Friedberg, Leora, Department of Economics, University of Virginia

The first chapter is entitled "Do Taxes Influence the Organizational Boundaries of International Firms? An Income-Shifting Channel through Transfer Pricing." Firms importing intermediate goods choose between outsourcing and vertical integration. When corporate tax rates differ between the home country and the foreign country, the possibility of shifting income and reducing overall tax payments through transfer pricing makes integration more attractive than outsourcing. This paper develops an incomplete-contracting model in which an international firm chooses whether to internalize intermediate transactions, and if so, how much responsibility to delegate from the home headquarters to the foreign affiliate in order to establish the optimal tax-oriented transfer price. Empirical evidence verifies some of the observable predictions from the theory: larger cross-country differences in corporate tax rates, higher product intangibility, higher firm productivity and lower trade costs lead to a higher probability of integration as well as a larger percentage difference between the transfer price and the arm's-length price. The second chapter "Export Prices of U.S. Firms" is joint work with James Harrigan and Victor Shlychkov. Using transaction-level export data from the U.S. Linked Firm Trade Transaction Database in 2002, this paper is the first to employ U.S. firmlevel data to show that exporting firms charge prices for narrowly defined goods that differ substantially with the characteristics of firms and export markets. We control for selection into export markets using a three-stage estimator and establish three ii main facts. First, and most novel, highly productive and skill-intensive firms charge higher prices, while capital-intensive firms charge lower prices. Second, the very large correlation between distance and export prices found in previous research is largely due to a composition effect. Third, U.S. firms charge slightly higher prices to larger and richer markets, and substantially higher prices to markets other than Canada and Mexico.

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PHD (Doctor of Philosophy)
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