Deals or Ideals: Regulating Domestic Firms as Persuasion

• In Event: Firms and Political Risk

Abstract

How do authoritarian governments demonstrate to multinational corporations (MNCs) that they are committed to a particular policy or possess sufficient negotiating influence? This project argues that authoritarian policymakers can strategically design inefficient domestic regulatory apparatus to signal that the state has great bargaining power vis-a-vis the private sector. Specifically, to persuade the MNC that their contribution to the local industry is substitutable, the policymaker uses its costly regulation of domestic firms as an experiment. Even though domestic firms are not immune to the regime's direct control, their incentives are not perfectly aligned with the regime. As a result, the domestic firms' compliance level with local regulations reveals information about the power structure between the state and the private sector in the host country, which helps MNCs design their subsequent business strategy. This highly constrained choice set of information structure improves the policymaker's ability to commit to credible communication without formal institutions.

This paper formalizes three situations where the policymaker, the sender, receives zero, imperfect, and perfect signals respectively. Leveraging real-world examples from the textile, new energy vehicles, and bitcoin industries in the context of China, this paper illustrates how varying levels of signal precision observed by the sender privately correspond to different sectors in the home market of the host country. Through the comparison of these three cases, the project identifies the situation under which the policymaker can benefit from more precise private information and maximize his persuasion result.

Theoretically, the paper contributes to the political economy literature by revealing the informational role of inefficient regulation. Applying the framework of Bayesian Persuasion to the context of domestic regulation as persuasion to multinational corporations, the paper uncovers how regulation enforcement shapes the gradual belief formation of multinationals, which informs their business strategies in the host country. In terms of the modeling device, the choice set of information structure--- the leniency or the difficulty of regulation, through which information is conveyed by the sender, is highly constrained. Instead of choosing the information structure itself, the sender of the game is deterred from choosing an arbitrary signal mapping. The idea that the sender is prohibited from choosing flexible information acquisition or information design could be applied in other cases in the persuasion literature. Furthermore, the paper shows how the sender’s varying levels of private information not only shape the sender’s optimal choices but also determine the policy learning strategies of the receiver.

Author

• lingnan he, the University of Chicago