Wages and International Rent Sharing in Multinational Firms

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Abstract
We use a unique firm-level panel of multinational parents and their foreign affiliates to analyze whether profits are shared across borders within multinational firms. Affiliate wages 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% of observed variation in affiliate wages. These results reveal a previously ignored aspect of rent sharing. They also reveal an important micro-level linkage with potential macro-level implications. International rent sharing can transmit economic conditions across countries, and can thereby provide an implicit risk-sharing mechanism. © 2005 President and Fellows of Harvard College and the Massachusetts Institute of Technology.