Economics of International Investment Agreements

Nearly 2700 highly potent international investment agreements protect foreign investment against host country policies. This paper analyzes the design and implications of their contentious provisions regarding regulatory expropriations. It derives conditions under which “carve-out” compensation mechanisms, similar to those in actual agreements, solve underinvestment and overregulation problems and simultaneously distribute surplus according to countries' bargaining power. The paper examines a number of additional policy relevant issues, for instance, how to modify agreements when carve-out compensation is inefficient, whether agreements cause “regulatory chill,” and the different motives and distributional consequences of North-South versus North-North agreements.