Horst H. Raff

Date of Award


Degree Type


Degree Name

Doctor of Philosophy


This thesis investigates the effects of asymmetric information on the relationship between multinational enterprises (MNEs) and host countries. With incomplete information about a MNE's technology, the threat of expropriation does not always deter foreign direct investment (FDI), so that expropriation may actually occur with nonzero probability. Improvements in a MNE's investment alternatives, a rise in production costs or tax rates diminish the likelihood of expropriation. Low-cost countries are more likely than high-cost countries to expropriate MNEs. Low-cost industries simultaneously face higher tariffs and a higher expropriation rate.;Chapter three uses a principal-agent model to examine optimal host country taxation of a horizontally and vertically integrated MNE. The host government lacks relevant information about the MNE's costs and transfer price. The optimal taxation mechanism consists of a lump-sum profit tax/quantity tax combination. The possibility of transfer pricing affects the government in two ways: First, the choice of tax mechanisms is reduced; second, the MNE has to be induced to reveal both costs and transfer price.;Chapter four uses data for the Jamaican bauxite industry in 1973 to simulate the optimal regulatory regime derived in chapter III. In 1974 Jamaica replaced its corporate income tax with a production levy on bauxite. We compare the effects on output and tax revenue of the actual pre-1974 and post-1974 taxes with those of the optimal policy. In fact, the optimal tax system closely resembles a combination of the two actual policies. We conclude that by using the optimal scheme Jamaica could have increased its tax revenue manyfold.;Chapter five uses a dynamic signaling game to investigate the effects of incomplete information about host country demand on the government's tax and tariff policy, and MNE's choice between FDI and exporting. When investment costs are low relative to exporting costs and/or the MNE anticipates large host country demand, tariff walls are sufficient to induce FDI. If the MNE is pessimistic about host country demand, tariff walls have to be supplemented with tax holidays to obtain investment. Tax holidays always appear in combinations with tariff walls.



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