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

Development Studies Working Paper No. 151

28 Pages Posted: 4 Nov 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: May 2001

Abstract

Why do we observe some LDCs objecting 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 kind of agreements. In our model, participation to 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 typesof 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 are not guaranteed for all countries.

Keywords: Foreign direct investment, International agreements, Incomplete contracts, Adverse selection, 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 Investments (May 2001). Development Studies Working Paper No. 151, Available at SSRN: https://ssrn.com/abstract=288428 or http://dx.doi.org/10.2139/ssrn.288428

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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