Economic policy uncertainty, contracting frictions and imports sourcing decisions

Abstract

This paper studies whether economic policy uncertainty could interact with contracting frictions to jointly affect importers’ choice to source from integrated parties or external parties. Using Related Party Trade dataset for the US, Economic Policy Uncertainty dataset by Baker et al. (2016) and contract intensity constructed by Nunn (2007), we find that US importers in high contract intensity industries would respond to increased economic policy uncertainty by increasing intra-firm trade share. Particularly, the intra-firm imports share would increase by 4.87% compared to the mean when the EPU and the contract intensity both rise from 10th to 90th percentile. In addition, we find that this effect is more pronounced for developing countries.