The Four Regions of Settlement Space: A Game-Theoretical Approach to Investment Treaty Arbitration
53 Pages Posted: 25 Jan 2016 Last revised: 12 Apr 2017
Date Written: January 17, 2016
This article uses game theory to investigate investor-state dispute settlement and related dispute resolution strategies through international arbitration. When deciding whether either to bring or to defend a claim rather than pursue settlement, investors and states will select strategies to maximize their respective payoffs, either by securing compensation or successfully defeating a claim for compensation. This article develops a model decision making strategy for claimant investors and defendant states based on the observed patterns of outcomes in actual investment treaty arbitration awards. Embedding the problem in the context of utility and hence risk-aversion, it will offer a general solution for the arbitration “game.” Four regions will be identified in the settlement space consisting of the respondent offer against claimant success probability. It will be shown that no settlement is possible in three of these four regions. The go-no-go probability of claimant victory below which it would not be reasonable for a potential claimant to proceed will be quantified. An algorithm is developed for calculating the settlement sum that the respondent may offer with a reasonable expectation of acceptance by the claimant. While the claimant’s chances of success may be disputed by the two parties in any particular case, a long-run average for the probability of success may be ascertained for a general claimant, which might prove more acceptable as a proxy. The resulting algorithm is tested and corroborated against published data on previous arbitration outcomes. The analytic tools derived are simple to apply, making it practical to commend them to those involved in investor-state disputes and their advisers.
Keywords: investment arbitration, game theory, minimax solution, international investment law
JEL Classification: K33, K41, C70, D20, D80
Suggested Citation: Suggested Citation