The economics of investor protection: ISDS versus national treatment

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 hold-up problem. It sh...

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Bibliographic Details
Published in:Journal of international economics 2019-11, Vol.121, p.103254, Article 103254
Main Authors: Kohler, Wilhelm, Stähler, Frank
Format: Article
Language:English
Subjects:
Foreign direct investment
Investor-state dispute settlement
National treatment provision
Regulation
TPP
TTIP
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Summary: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 hold-up 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 hold-up problem also apply to domestic firms. If the domestic regulatory framework applies to many domestic firms, a national treatment provision welfare-dominates ISDS.
ISSN:0022-1996
1873-0353
DOI:10.1016/j.jinteco.2019.103254