published in: Review of Economics and Statistics, 2005, 81 (1), 73-84
We use a unique firm-level panel data set of multinational parents and their foreign affiliates
to analyze whether profits are shared across borders within multinational firms. Using both
fixed-effects and generalized method-of-moments estimators, affiliate wage levels are
estimated to respond to both affiliate and parent profitability. The elasticity of affiliate wages
to parent profits per worker is approximately 0.03, which can explain over 20 percent of the
observed variation in affiliate wages. These results reveal a previously ignored aspect of
labor-market rent sharing. They also reveal an important micro-level linkage with potential
macro-level implications. International rent sharing can transmit economic conditions across
national borders, and can thereby provide an implicit cross-country risk-sharing mechanism.
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