Subsequent to editorial input by Cambridge University Press, paper is forthcoming in:World Politics, vol. 65, no. 2 (April 2013)Abstract. Using the international investment regime as its point of departure, the paper applies notions of bounded rationality to the study of economic diplomacy. Through a multi-method approach, it shows that developing countries often ignored the risks of bilateral investment treaties (BITs) until they themselves became subject to an investment treaty claim. Thus the behavior of developing country governments with regard to the international investment regime is consistent with that consistently observed for individuals in experiments and field studies: they tend to ignore high-impact, low-probability risks if they cannot bring specific 'vivid' instances to mind.

Solar and wind electricity generation technologies have become cost competitive and account for a growing share of global investment in new electricity generation capacity. Both India and Indonesia have ambitious targets for adoption of these technologies, and India has an impressive current rate of uptake. Substantial obstacles exist, however, including the entrenched positions of coal and other fossil fuels, regulatory barriers to market access, and weak abilities of electricity utilities to manage intermittent renewables. This paper reviews these obstacles and discusses strategies to overcome them. We focus on the use of reverse auction processes able to deliver low-price solar and wind contracts, as are being successfully employed in India, on tax and subsidy reform options, on regulatory and incentive-design strategies, on approaches to bolster grid management capacities, and on the importance of minimising protectionist barriers. Our analysis covers both small-scale and large-scale systems.

The rapid and concurrent increase in both foreign investment and government efforts to attract foreign investment at the end of last century makes the question of causality between the two both interesting and challenging. I take up this question for the case of the nearly 2,500 bilateral investment treaties (BITs) that have been signed since 1980. Using data on bilateral investment outflows from OECD countries, I test whether BITs stimulate investment in twenty eight low-and middle-income countries. In contrast to previous studies that have found a strong effect from BIT participation, I explicitly model and empirically account for the endogeneity of BIT adoption. I also test for a signaling effect from BITs. I find that the initially strong correlation between BITs and investment flows is not robust controlling for selection into BIT participation. Furthermore, I find no evidence for the claim that BITs signal a safe investment climate. My results show the importance of accounting for the endogeneity of adoption when assessing the benefits of investment liberalization policies. In contrast to previous studies that have found a strong effect from BIT participation, I explicitly model and empirically account for the endogeneity of BIT adoption. I also test for a signaling effect from BITs. I find that the initially strong correlation between BITs and investment flows is not robust controlling for selection into BIT participation. Furthermore, I find no evidence for the claim that BITs signal a safe investment climate. My results show the importance of accounting for the endogeneity of adoption when assessing the benefits of investment liberalization policies. * I would like to thank Ann Harrison and Larry Karp for their excellent advice and support. This paper has also benefited enormously from the comments and suggestions of Carol McAusland, Jenny Lanjouw, Ted Miguel, Jeff Perloff, Suzanne Scotchmer and Brian Wright, as well as numerous seminar participants. Bilateral Investment Treaties and Foreign

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Modern international investment agreements have challenged the customary exclusion of public good regulations from being considered government 'takings' subject to compensation rules. Full compensation for regulatory takings can, however, lead to over-investment and excessive entry in risky industries. An alternative is to 'carve-out' apparently efficient regulation from compensation requirements. We design a carve-out/compensation rule that induces efficient regulation and firm-level investment even when the regulator suffers fiscal illusion and has private information about the social benefit from regulation. We also show that a carve-out reduces the subsidy to risky industry implicit in compensation rules, and thus mitigates the entry problem.

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International investment agreements allow investors to bring compensation claims when their investments are hurt by new regulations. This requirement that host governments compensate for indirect expropriation helps solve post-investment moral hazard problems such as holdups , thereby helping to prevent inefficient over-regulation and encouraging foreign investment. However, when the social or environmental harm of a project is uncertain pre-investment, compensation requirements can interact with National Treatment clauses in a manner that reduces host government welfare and makes them less likely to admit investment. A police powers carveout from the definition of compensable expropriation can be Pareto-improving and increase foreign investment.

An adversarial game is used to model the amount of influence a firm has over a government regulator, and its equilibrium level of regulation, as a function of firm fundamentals. The effective influence of a firm is identified as comprising both intrinsic and exerted components; where the latter involves distorting regulation via a transfer to the regulator. Understanding the source of a firm's high influence is found to be important for -among other things -predicting whether it faces higher or lower regulatory constraint than other firms. Data from the World Business Environment Survey provides strong evidence in support of model hypotheses across a wide range of government agents, countries, and regulatory areas. Of particular relevance to public debate, large firms are found to be more likely to be influential, but also more likely to experience regulatory constraint than smaller firms.