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DECTI Trade Seminar: Contractual vs. Arm’s Length Trade: Empirical Evidence on the Sorting of Firms and Products


  • Ying Ge, University of International Business and Economics
  • Huiwen Lai, The Hong Kong Polytechnic University
  • Susan Chun Zhu, Michigan State University 

Abstract: Using matched Customs trade and Chinese firm data during 2000-2006, we examine firms’ decision about contractual and arm’s length trade. We find that about one third of firms do both contractual and arm’s length trade. These firms are bigger, more productive and more capital intensive than firms that do purely contractual or arm’s length trade. We also find that lower import tariffs increase the incentive for firms to do arm’s length trade.

We further investigate how the bundle of exports differs across and within firms. Compared to pure contractual or arm’s length exporters, firms that do both contractual and arm’s length trade produce more varieties, export to more countries, charge higher prices, and sell more to higher-income countries. In the majority of these firms, contractual exports involve smaller number of varieties and destinations than arm’s length trade.

For Information: Yasmin D Souza

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