Roughly one-third of world trade is intrafirm trade. This paper starts by unveiling two systematic patterns in the volume of intrafirm trade. In a panel of industries, the share of intrafirmimportsintotalU.S.importsissignificantly higher, the higher the capital intensity of the exporting industry. In a cross-section of countries, the share of intrafirmimportsintotalU.S.importsissignificantly higher, the higher the capital-labor ratio of the exporting country. I then show that these patterns can be rationalized in a theoretical framework that combines a Grossman-Hart-Moore view of the firm with a Helpman-Krugman view of international trade. In particular, I develop an incomplete-contracting, property-rights model of the boundaries of the firm, which I then incorporate into a standard trade model with imperfect competition and product differentiation. The model pins down the boundaries of multinational firmsaswellasthe international location of production, and it is shown to predict the patterns of intrafirm trade identified above. Econometric evidence reveals that the model is consistent with other qualitative and quantitative features of the data
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