Incentive Regulation of Multinational Enterprises

Sectors with a long regulatory tradition have recently experienced intense activity by multinationals whose international operations and relocation threats represent a new cause for concern for regulators. I analyse a multinational serving two countries and being regulated by two national authorities. The firm is shown to favor, or cross-subsidize, the country with a larger stake in the firm's profit and the linkage among national regulations may induce unexpected effects on outputs. I also analyze multinational's lobbying decisions and its effects on national regulations. Finally, a credible threat to "fly" away from tough regulators lets the firm obtain larger profits.