Close to 2 700 state-to-state investment agreements (IIAs) worldwide protect foreign direct investment (FDI) against host country policies. We analyze the design and implications of protection against regulatory expropriations in IIAs, emphasizing the role of externalities from FDI, countries unilateral commitment possibilities, and the direction of investment ows. We show e.g. that (i) simple compensation mechanisms found in IIAs have desirable efficiency properties; (ii) optimal agreements do not cause underregulation ("regulatory chill"); (iii) IIAs can have strong distributional effects by benefitting investors at the expense of the rest of society; and (iv) IIAs should go further than only to impose non-discrimination.
Working Paper No. 1140
Economics and Politics of International Investment Agreements