MNEs. We have then to replace the notion of full MAI equilibrium with that
of “residual MAI” equilibrium, namely, a configuration where p = 1 and where
all countries with βh > ° are willing to enter MAI. By arguments analogous
to those used for the cases where ° < βl we can characterize equilibrium with
respect to ° in the following Proposition.
Proposition 5 Consider ° > βl. Then, there exists °L, °l < °L < °u, such
that: i) if °<°L the only equilibrium is “no MAI”; ii) if °>°u the only
equilibrium is “residual MAI”; iii) if °L <°<°u the equilibrium may either
be “no MAI”, “partial MAI”, or “residual MAI”.
Proof: See Appendix 5.
Results in Propositions 4 and 5 can be summarized with the help of Figure
1. In general, we observe that the size of MAI rises and then falls as it becomes
stricter. For sn∏'icieιι∣]y low values of ° the discipline effect of MAI is not
strong enough to offset the adverse selection effect, and this explains why the
only equilibrium tends to be the no MAI equilibrium. In this case, FDIs would
be directed only to non-MAI countries, and no country would choose to enter
the agreement.
Insert figure 1 about here
As ° rises, the emergence of partial MAI becomes possible. The adverse
selection effect can be offset by the discipline effect. In this case, coordination
problems are very strong. The extent of adverse selection depends upon the
size of MAI. A large MAI has small adverse selection problems, and can be
self-sustaining even if the discipline effect is not too big. Conversely, a small
MAI will strongly suffer from adverse selection, and could end up being unsus-
tainable even with a rather high discipline gain. This explains the coexistence
of equilibria with no MAI and with full (or residual) MAI when ° has interme-
diate values. Note also that in this region the size of partial MAI shrinks as
° rises, because, by Lemma 2, the threshold value β* rises. A further growth
in the value of ° leaves full or residual MAI as the only possible equilibrium
configurations; the discipline effect is prevailing. As ° rises further, though, the
size of MAI inevitably shrinks: the countries with the lowest bargaining power
will drop out, because MAI is becoming too strict for them. Note also that, at
given °, the size of MAI tends to rise with βl . As the average bargaining power
of countries rises, it will be easier to realize a successful MAI. By the argument
presented in Lemma 1, few countries will choose to stay outside of MAI at a
given ° .
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