Arm's-length transactions as a source of incomplete cross-border transmission: The case of autos

A large share of international trade occurs through intrafirm transactions. We show that this common cross-border organization of the firm has implications for the welldocumented incomplete transmission of shocks across such borders. We present new evidence of an inverse relationship between a firm’s outsourcing of inputs and its rate of exchange rate pass-through. We then develop a structural econometric model with final assemblers and upstream parts suppliers to quantify how firms’ organization of their activities across national borders affects their pass-through behavior.