Investor-State vs. State-State Dispute Settlement

International investment agreements typically permit foreign investors to litigate against host countries (Investor-State Dispute Settlement, ISDS). Yet, common criticism holds that host countries would benefit from allowing only foreign governments to litigate (State-State Dispute Settlement, SSDS). We analyze the negotiated dispute settlement mechanism when SSDS generates political costs that affect the source country's incentives to initiate disputes and the host country's incentives for opportunistic regulation of investments. We show that agreements might rely exclusively on SSDS for given obligations regarding investment protection. However, investment agreements will always include ISDS when countries negotiate both dispute settlement and investment protection.