The Economics of Investor Protection: ISDS versus National Treatment

54 Pages Posted: 23 Oct 2019

See all articles by Wilhelm Kohler

Wilhelm Kohler

University of Tuebingen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Frank Stähler

University of Tuebingen - Department of Economics; University of Adelaide - School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 2019

Abstract

Investor-state dispute settlements (ISDS) are supposed to protect foreign investors against domestic policies causing “unjustified” harm. This paper scrutinizes the effects of investor-state dispute settlements (ISDS) and national treatment provisions in a two-period model where foreign investment is subject to domestic regulation and a holdup problem. It shows that ISDS can mitigate the holdup problem and increases aggregate welfare, but comes with additional regulatory distortions for the first period. A national treatment provision avoids these regulatory distortions, but implies entry distortions because it makes the holdup problem also apply to domestic firms. If the domestic regulatory framework applies to many domestic firms, a national treatment provision welfare-dominates ISDS.

Keywords: investor-state dispute settlement, national treatment provision, foreign direct investment, TTIP, TPP, regulation

JEL Classification: F210, F230, F530, F550

Suggested Citation

Kohler, Wilhelm K. and Stähler, Frank, The Economics of Investor Protection: ISDS versus National Treatment (August 2019). Available at SSRN: https://ssrn.com/abstract=2752375 or http://dx.doi.org/10.2139/ssrn.2752375

Wilhelm K. Kohler (Contact Author)

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Frank Stähler

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

HOME PAGE: http://www.frank-staehler.de

University of Adelaide - School of Economics ( email )

Adelaide SA, 5005
Australia

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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