Commercial Policy towards Multinational Corporations under Imperfect Information

Shabtai Donnenfeld and Thomas Prusa

Review of International Economics, 1993, vol. 1, issue 2, 164-79

Abstract: This paper examines host country government (HCG) commercial policy towards imports resulting from intrafirm trade conducted by a multinational corporation (MNC). The effectiveness of the HCG's commercial policy is impaired by its limited information about the MNC's cost of production. The commercial policy consists of restrictions on intrafirm transactions. We construct and characterize the optimal commercial policy under imperfect information and find that under imperfect information the optimal policy entails a distorted transfer price and a lower level of intrafirm trade relative to the full information case. Welfare implications of commercial policy under imperfect information are also examined. Copyright 1993 by Blackwell Publishing Ltd.

Date: 1993
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