Regulatory Chill and the Effect of Investor State Dispute Settlements

40 Pages Posted: 23 Oct 2019

See all articles by Eckhard Janeba

Eckhard Janeba

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 2019

Abstract

Legal conflicts between multinational firms and host governments are often decided by international arbitration panels - as opposed to courts in the host country - due to provisions in international investment agreements known as Investor State Dispute Settlements (ISDS). Critics fear that investor protection such as ISDS make governments reluctant to adopt appropriate policies (regulatory chill). In this paper I develop a theoretical model in which the outcome of cases brought to court is uncertain due to the vagueness of the law protecting investors and a court’s inability to correctly identify a state of nature with certainty. I show that from a world welfare perspective there is no underregulation, only an overregulation problem. However, from a national welfare perspective “frivolous” lawsuits may lead to regulatory chill. I also identify conditions under which ISDS can lead to a Pareto improvement which involves simultaneous changes in compensation payments and protection rights relative to a national court.

Keywords: Investor State Dispute Settlement, TTIP, regulatory chill, international investment agreement, foreign direct investment

JEL Classification: F230, F530, H250

Suggested Citation

Janeba, Eckhard, Regulatory Chill and the Effect of Investor State Dispute Settlements (July 2019). CESifo Working Paper Series No. 6188, Available at SSRN: https://ssrn.com/abstract=2887952

Eckhard Janeba (Contact Author)

University of Mannheim - Department of Economics ( email )

L7, 3-5
D-68131 Mannheim
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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