Wages and international rent sharing in multinational firms

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. The economic implications of increased globalization have been widely conjectured and researched. One prominent concern has been how foreign competition, trade protection, and foreign ownership affect the level and distribution of wages.1 Largely overlooked, however, has been the issue of whether international linkages condition how firms share profits with thei