Regulatory Chill and the Effect of Investor State Dispute Settlements

27 Pages Posted: 5 Jun 2020

See all articles by Eckhard Janeba

Eckhard Janeba

University of Mannheim - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2019

Abstract

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.

Suggested Citation

Janeba, Eckhard, Regulatory Chill and the Effect of Investor State Dispute Settlements (September 2019). Review of International Economics, Vol. 27, Issue 4, pp. 1172-1198, 2019, Available at SSRN: https://ssrn.com/abstract=3618545 or http://dx.doi.org/10.1111/roie.12417

Eckhard Janeba (Contact Author)

University of Mannheim - Department of Economics ( email )

L7, 3-5
D-68131 Mannheim
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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