The economics of investor protection: ISDS versus national treatment

Abstract

Investor-state dispute settlements (ISDS) are supposed to protect foreign investors against domestic policies causing "unjustified" harm. This paper scrutinizes the effects of ISDS and national treatment provisions in a two-period model where foreign investment is subject to a holdup problem. It shows that ISDS may increase welfare, but comes with additional regulatory distortions in the first period. A national treatment provision avoids these regulatory distortions, but implies entry distortions because it makes the holdup problem also apply to domestic firms. If the domestic regulatory framework applies to many domestic firms, a national treatment provision welfare-dominates ISDS.

Regulatory chill and the effect of investor state dispute settlements

“…Bagwell and Staiger (2001a, 2001b) argue that concerns over regulatory chill are not valid in the case of trade agreements that deal with regulatory policies relating to traded goods (as opposed to FDI), provided that market access is properly guaranteed. Closely related to the present work is research by Kohler and Stähler () who compare the effects of ISDS and national treatment clauses. They argue that ISDS can reduce the hold‐up problem, but affects inefficiently the regulatory standard setting over time.…”

Investor-State vs. State-State Dispute Settlement

“…1 0 See the contributions by e.g. Janeba (2016), Kohler and Stähler (2016), Konrad (2017), Schjelderup and Stähler (2016), and Horn and Tangerås (2017).…”

Economics and Politics of International Investment Agreements

“…Janeba (2016) shows how the incentive for a country to form an investment agreement depends on the losses from unfavorable determinations, and the benefits for its own foreign investors from discrimination in their favor in the partner country. Kohler and Stähler (2016) examine consequences of a particular interpretation of the "legitimate expectations" notion that sometimes has been employed by arbitration panels. It holds that past regulatory policies can create legitimate investor expectations about subsequent regulations, and thus effectively link regulatory decisions across time.…”