Between Commitment and Flexibility: The Fragile Stability of the International Investment Protection Regime

U. of St. Gallen Law & Economics Working Paper No. 2008-23

19 Pages Posted: 17 Sep 2008

See all articles by Anne van Aaken

Anne van Aaken

University of Hamburg, Law School; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Date Written: September 1, 2008

Abstract

This article analyzes international investment protection law by using tools of economic contract theory. Contract theory has been applied to international trade law, but investment law has not yet been analyzed under this methodology.

Bilateral Investment Treaties or International Investment Agreements may be interpreted as a mechanism for overcoming commitment problems between investor and host state in order to generate mutual benefits. States thereby trade credibility for sovereignty as international investment law restricts the regulatory conduct of states to an unusual extent, subject to control through compulsory international adjudication. A well-known problem in contract theory is how to deal with uncertainty. Parties cannot easily design contracts that maximize jointly beneficial investments and at the same time respond appropriately to changing conditions ex post. Changing conditions are a prevalent characteristic in investment law covering long term investments. Contract theory finds that too strict and inflexible contracts may impair the joint surplus of the contracting parties. Thus, a trade-off arises between ex ante strong commitment devices on the one hand and flexibility ex post in order to uphold the efficiency of the contract on the other hand. The article analyzes commitment and flexibility mechanism in international investment protection law and proposes to use similar mechanisms to the WTO law in order to design more optimal contracts (that is investment treaties).

Keywords: International Investment Law, International Law, Contract Theory

JEL Classification: F21, K33, D86

Suggested Citation

van Aaken, Anne, Between Commitment and Flexibility: The Fragile Stability of the International Investment Protection Regime (September 1, 2008). U. of St. Gallen Law & Economics Working Paper No. 2008-23. Available at SSRN: https://ssrn.com/abstract=1269416 or http://dx.doi.org/10.2139/ssrn.1269416

Anne Van Aaken (Contact Author)

University of Hamburg, Law School ( email )

Johnsallee 35
Hamburg, 20148
Germany

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
371
Abstract Views
1,741
rank
78,401
PlumX Metrics