International Rent Sharing in Multinational Firms

We use a unique firm-level panel data set of multinational parents and their foreign affiliates to analyse 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% of observed variation in affiliate wages. These results reveal a previously ignored aspect of labour-market rent sharing. They also reveal an important micro-level linkage that can transmit economic conditions across national borders and that can provide an implicit cross-country risk-sharing mechanism.