For Whom is Mai? A Theoretical Perspective on Multilateral Agreements on Investment

33 Pages Posted: 1 May 2001

See all articles by Alessandro Turrini

Alessandro Turrini

European Commission; Centre for Economic Policy Research (CEPR)

Dieter M. Urban

Johannes Gutenberg University of Mainz - Institute for International Economic Theory; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: April 2001

Abstract

Why do we observe some LDCs objecting to the prospect of a Multilateral Agreement on Investment (MAI), although they have been keen to liberalize investment in preferential agreements in recent years? In this Paper, we analyse the issue of MAI implementation and assess the welfare consequences of such a kind of agreement. In our model, participation in MAI involves a trade-off between less rent extraction from multinational firms (MNEs) and more abundant FDI inflows. At equilibrium, either all countries enter MAI, or all countries stay out, or only some of them enter. Coordination problems may induce multiple equilibria: the three types of equilibria may coexist. So, the implementation of MAI may depend not only on structural factors but also on the general 'political climate'. When all countries join MAI, world welfare is maximized because this minimizes the hold-up problem faced by MNEs and stimulates investment. However, in an asymmetric world, welfare gains for all countries are not guaranteed.

Keywords: Adverse selection, foreign direct investment, incomplete contracts, international agreements, multiple equilibria

JEL Classification: F13, F23, O19

Suggested Citation

Turrini, Alessandro and Urban, Dieter M., For Whom is Mai? A Theoretical Perspective on Multilateral Agreements on Investment (April 2001). CEPR Discussion Paper No. 2774. Available at SSRN: https://ssrn.com/abstract=268280

Alessandro Turrini (Contact Author)

European Commission ( email )

Office BU-10/113
B-1049 Brussels
Belgium
+32 2 299 5072 (Phone)
+32 2 299 3505 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Dieter M. Urban

Johannes Gutenberg University of Mainz - Institute for International Economic Theory ( email )

D 55099 Mainz
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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