Macroeconomics

Algorithm

Linguistics

Philosophy

Law and economics

Investor-state dispute settlement

Foreign direct investment

Vagueness

International arbitration

Archaeology

Economics

Computer science

Arbitration

Human settlement

Business

International trade

Keynesian economics

International investment

Politics

Geography

Political science

Monetary economics

Fuzzy logic

Multinational corporation

International economics

Finance

Investment (military)

State (computer science)

History

Review of International Economics

Legal conflicts between multinational firms and host governments are often decided by international arbitration panels—as opposed to courts in the host country—because of provisions in international investment agreements known as investor state dispute settlements (ISDS). Critics fear that investor protection such as ISDS make governments reluctant to adopt appropriate policies (regulatory chill). In this paper I develop a theoretical model in which the outcome of cases brought to court is uncertain owing to the vagueness of the law protecting investors and a court's inability to correctly identify a state of nature with certainty. I show that from a world welfare perspective there is no underregulation, only an overregulation problem. However, from a national welfare perspective “frivolous” lawsuits may lead to regulatory chill. I also identify conditions under which ISDS can lead to a Pareto improvement that involves simultaneous changes in compensation payments and protection rights relative to a national court.

Regulatory chill and the effect of investor state dispute settlements