For Whom is MAI? A theoretical Perspective on Multilateral Agreements on Investments

to countries with low bargaining power. Since the loss of bargaining power asso-
ciated with participation in MAI is fixed at °; the percentage loss of bargaining
power from MAI is lower for “high-beta” countries. This explains why those
countries that are most willing to participate in MAI are characterized by high
bargaining power. This result has important implications. At given β_h MNEs
always prefer to invest in a country that belongs to MAI. This is due to ”in-
creased discipline” associated with MAI: any country reduces by assumption its
rent extraction rate, if it becomes MAI member. However, β_h is revealed to
firms only ex-post, so that the location decision is determined on the basis of
the comparison of conditional expected profits in MAI and non-MAI countries.
Since countries participating in MAI tend to be characterized by high bargaining
power, the decision to invest in MAI is also shaped by the extent of the adverse
selection, that tends to reduce expected MNE profits in MAI and gives a reason
for a possible preference for locating FDIs in non-MAI countries.²³ Note also
that the extent of the adverse selection is higher when MAI is small, because in
this case only countries with very high bargaining power are in MAI.

Lemma 1 permits a simple characterization of z as a function of β. From
the uniform distribution function of β_h across countries we obtain

Whenever β ∙ β_l the candidate equilibrium is necessarily a full MAI, whereas,
if β ≥ 0:5 we can only have no MAI at equilibrium, finally, when β_l < β < 0:5
we have a value of z consistent with a partial MAI equilibrium.

Next, we proceed by characterizing the conditional expected profits of MNEs
with respect to the bargaining power of the indifferent country β. MNEs form
expectations on the profits they may earn in a given country h using the infor-
mation revealed by its decision on whether to enter MAI or not. Using Lemma
1, conditional expected profits in a MAI and in a non-MAI country, respectively,
are formed as follows:

0:⁵ R^β (^{1 - β}h)2 ^dβh

and E-z ¼ =-----¹~= --------: (8)

β - β_l

Denote by ¢E the difference Ez¼ — E_-z¼ and by β* the value of β that
satisfies the equality ¢E = 0. The behavior of MNEs’ expected profits is
summarized in the following Lemma.

Lemma 2 i) β* exists in (β_b 0:5) and is unique if ° < ° < °u; with °ι and °u
monotonically decreasing functions of the parameter β_l; ii) β* is monotonically

^{2 3} Adverse selection comes from the assumption of a fixed loss in bargaining p ower, which
guarantees that the proportional loss from MAI membership is higher for low-b eta countries. If
the loss were proportionally higher for high-beta countries, the only possible equilibrium would
trivially be with MNEs always investing only in MAI countries, and full MAI memb ership by
all countries.

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