Regulation of multinational firms with two active governments: A common agency approach

Abstract When a government agency imposes cost-based taxes/ regulations on a multinational with private cost information, it may initiate countervailing regulations by another of the governments with which the multinational interacts. We analyze the problem of optimal regulation of a multinational under incomplete cost information (via trade taxes) by multiple governments as a problem of common agency with adverse selection. By focusing on the game played by the competing governments we characterize the equilibrium trade taxes and show that the non-cooperative behavior of the governments not only reduces aggregate national welfare but also reduces firm profits.