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Title: |
Foreign Direct Investment as a Commitment
Mechanism in the Presence of Managed Trade |
| Author: |
Aizenman,
Joshua |
| Author
Affiliation: |
Dartmouth
College and NBER |
| Source: |
International Economic Journal, Winter 1996, v. 10, no. 4, pp. 1-28 |
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Publication Date: |
Winter 1996 |
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Abstract: |
This paper evaluates the degree to which
the threat of managed trade leased to foreign direct investment (FDI) in
a time-consistent manner. An endogenous switch from free to managed
trade may occur ex-post as the outcome of a sequential game. We identify
time-inconsistent patterns of managed trade in the absence of capital
mobility. We demonstrate that FDI alleviates this time inconsistency by
reducing the ex-post incentive of one country to switch to managed
trade. FDI induced by the threat of managed trade benefits ex-ante both
the host country and the multinationals, explaining the relative
tolerance toward FDI. |
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