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Regulatory chill and the effect of investor state dispute settlements
Author(s) -
Janeba Eckhard
Publication year - 2019
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12417
Subject(s) - investor state dispute settlement , vagueness , arbitration , multinational corporation , business , international arbitration , economics , law and economics , human settlement , state (computer science) , foreign direct investment , international investment , international trade , law , finance , political science , macroeconomics , archaeology , algorithm , fuzzy logic , history , linguistics , philosophy , computer science
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.