Answer Happy

A multinational firm (M) is contracting with a supplier (S) in another country. The supplier can save costs by running its plant as a "sweatshop" with minimal investments in the safety and social conditions of its workers. However, there is a 50% risk that this will be revealed to the outside world, in which case M suffers brand damage and must choose between firing 5 and working with them to correct the problem. The game tree below shows the choices made by each player (including Nature) and the resulting payoffs to the two firms. Find all Nash equilibria, and all subgame perfect Nash equilibria. Is the outcome optimal for the MNE, for the two firms jointly, and/or for society? If not, which solutions exist to the problem? [15 marks] (S, M): Responsible S 5,35 11, 35 5,31 ✩ 9,25 Irresponsible N >Undetected (50%) M Detected (50%) Fire Work