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Optimal Regulation of Multinationals under Collusion
Author(s) -
Karabay Bilgehan
Publication year - 2017
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12410
Subject(s) - collusion , multinational corporation , host (biology) , foreign direct investment , government (linguistics) , industrial organization , microeconomics , investment (military) , constraint (computer aided design) , economics , welfare , business , market economy , finance , macroeconomics , mechanical engineering , ecology , linguistics , philosophy , politics , political science , law , biology , engineering
This paper analyses the optimal collusion‐proof mechanism for the regulation of multinational firms (MNFs) in foreign direct investment (FDI) projects. There is a host country with a profitable investment opportunity. Either a multinational firm (MNF) or a local firm (LF) can undertake this project; nonetheless due to its firm‐specific advantage, and the MNF has the potential to create a larger surplus. The host government faces an informational constraint such that it cannot observe the extra surplus the MNF can generate. Using this set‐up, Karabay (2010) shows that employing foreign ownership restrictions to force a joint venture (JV) can help the host government to partially overcome its information disadvantage. In this paper, we extend Karabay (2010) by studying the host government's optimal regulatory policy when the MNF and the LF can collude. It turns out collusion imposes no cost on the host government and the expected welfare attained in the absence of collusion can still be secured under collusion.