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Compensation for Indirect Expropriation in International Investment Agreements: Implications of National Treatment and Rights to Invest


  • Aisbett Emma

    (Australian National University)

  • Karp Larry

    (University of California, Berkeley and Giannini Foundation)

  • McAusland Carol

    (University of British Columbia)


International investment agreements allow investors to bring compensation claims when their investments are hurt by new regulations. This requirement that host governments compensate for indirect expropriation helps solve post-investment moral hazard problems such as hold-ups, thereby helping to prevent inefficient over-regulation and encouraging foreign investment. However, when the social or environmental harm of a project is uncertain pre-investment, compensation requirements can interact with National Treatment clauses in a manner that reduces host government welfare and makes them less likely to admit investment. A police powers carve-out from the definition of compensable expropriation can be Pareto-improving and increase foreign investment.

Suggested Citation

  • Aisbett Emma & Karp Larry & McAusland Carol, 2010. "Compensation for Indirect Expropriation in International Investment Agreements: Implications of National Treatment and Rights to Invest," Journal of Globalization and Development, De Gruyter, vol. 1(2), pages 1-35, December.
  • Handle: RePEc:bpj:globdv:v:1:y:2010:i:2:n:6

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    References listed on IDEAS

    1. Emma Aisbett & Larry Karp & Carol Mcausland, 2010. "Police Powers, Regulatory Takings and the Efficient Compensation of Domestic and Foreign Investors," The Economic Record, The Economic Society of Australia, vol. 86(274), pages 367-383, 09.
    2. Aisbett, Emma, 2007. "Bilateral Investment Treaties and Foreign Direct Investment: Correlation versus Causation," MPRA Paper 2255, University Library of Munich, Germany.
    3. Schmitz, Patrick W, 2001. "The Hold-up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," Bulletin of Economic Research, Wiley Blackwell, vol. 53(1), pages 1-17, January.
    4. Markusen, James R, 2001. "Commitment to Rules on Investment: The Developing Countries' Stake," Review of International Economics, Wiley Blackwell, vol. 9(2), pages 287-302, May.
    5. Josh Ederington, 2001. "International Coordination of Trade and Domestic Policies," American Economic Review, American Economic Association, vol. 91(5), pages 1580-1593, December.
    6. Levinson, Arik, 1997. "A Note on Environmental Federalism: Interpreting Some Contradictory Results," Journal of Environmental Economics and Management, Elsevier, vol. 33(3), pages 359-366, July.
    7. Lawrence Blume & Daniel L. Rubinfeld & Perry Shapiro, 1984. "The Taking of Land: When Should Compensation Be Paid?," The Quarterly Journal of Economics, Oxford University Press, vol. 99(1), pages 71-92.
    8. Jennifer Tobin & Susan Rose-Ackerman, 2003. "Foreign Direct Investment and the Business Environment in Developing Countries: the Impact of Bilateral Investment Treaties," William Davidson Institute Working Papers Series 587, William Davidson Institute at the University of Michigan.
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    Cited by:

    1. Aisbett, Emma & Busse, Matthias & Nunnenkamp, Peter, 2016. "Bilateral investment treaties do work: Until they don't," Kiel Working Papers 2021, Kiel Institute for the World Economy (IfW).
    2. Kohler, Wilhelm Kaspar & Stähler, Frank, 2016. "The Economics of Investor Protection: ISDS versus National Treatment," Annual Conference 2016 (Augsburg): Demographic Change 145652, Verein für Socialpolitik / German Economic Association.
    3. Schjelderup, Guttorm & Stähler, Frank, 2017. "Investor State Dispute Settlement and Multinational Firm Behavior," Discussion Papers 2017/4, Norwegian School of Economics, Department of Business and Management Science.
    4. Horn, Henrik & Tangerås, Thomas, 2016. "Economics and Politics of International Investment Agreements," Working Paper Series 1140, Research Institute of Industrial Economics.
    5. repec:spr:weltar:v:154:y:2018:i:1:d:10.1007_s10290-017-0285-1 is not listed on IDEAS
    6. Li, Chen, 2016. "Signing a Bilateral Investment Treaty - A tradeoff between investment protection and regulation," Annual Conference 2016 (Augsburg): Demographic Change 145505, Verein für Socialpolitik / German Economic Association.

    More about this item

    JEL classification:

    • K3 - Law and Economics - - Other Substantive Areas of Law
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements


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