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

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  • Emma Aisbett
  • Larry Karp
  • Carol McAusland

Abstract

International investment agreements in bilateral treaties or free trade agreements allow investors to bring compensation claims when their investments are hurt by new regulations addressing environmental or other social concerns. Compensation rules such as expropriation clauses in international treaties help solve post-investment moral hazard problems such as hold-ups, thereby helping to prevent inefficient over-regulation and encouraging foreign investment. However, when social or environmental harm is uncertain preinvestment, 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 can increase the level of foreign investment.

Suggested Citation

  • Emma Aisbett & Larry Karp & Carol McAusland, 2010. "Compensation for Indirect Expropriation in International Investment Agreements: Implications of National Treatment and Rights to Invest," CEPR Discussion Papers 648, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    • Handle: RePEc:auu:dpaper:648
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    File URL: https://www.cbe.anu.edu.au/researchpapers/CEPR/DP648.pdf
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    References listed on IDEAS

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    2. 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.
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    Cited by:

    1. Guttorm Schjelderup & Frank Stähler, 2021. "Investor‐state dispute settlement and multinational firm behavior," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 1013-1024, September.
    2. 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 Kiel).
    3. Kohler, Wilhelm & Stähler, Frank, 2019. "The economics of investor protection: ISDS versus national treatment," Journal of International Economics, Elsevier, vol. 121(C).
    4. Horn, Henrik & Tangerås, Thomas, 2021. "Economics of international investment agreements," Journal of International Economics, Elsevier, vol. 131(C).
    5. Horn, Henrik, 2022. "Investment Treaty Reform when Regulatory Chill Causes Global Warming," Working Paper Series 1450, Research Institute of Industrial Economics, revised 13 Feb 2023.
    6. Konrad, Kai A., 2017. "Large investors, regulatory taking and investor-state dispute settlement," European Economic Review, Elsevier, vol. 98(C), pages 341-353.
    7. Horn, Henrik & Tangerås, Thomas, 2016. "Economics and Politics of International Investment Agreements," Working Paper Series 1140, Research Institute of Industrial Economics.
    8. Emma Aisbett & Matthias Busse & Peter Nunnenkamp, 2018. "Bilateral investment treaties as deterrents of host-country discretion: the impact of investor-state disputes on foreign direct investment in developing countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(1), pages 119-155, February.
    9. Silvia MATÚŠOVà & Peter NOVà ČEK, 2022. "New generation of investment agreements in the regime of the European Union to international contracts," Juridical Tribune (Tribuna Juridica), Bucharest Academy of Economic Studies, Law Department, vol. 12(1), pages 21-34, March.
    10. Li, Chen, 2016. "Signing a Bilateral Investment Treaty - A tradeoff between investment protection and regulation," VfS Annual Conference 2016 (Augsburg): Demographic Change 145505, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    foreign direct investment; regulatory takings; expropriation; international investment agreements; National Treatment; environment;
    All these keywords.

    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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