Compensation under Investment Treaties – As if Host Interests Mattered

22 Pages Posted: 9 Nov 2018 Last revised: 12 Nov 2018

See all articles by Emma Aisbett

Emma Aisbett

ANU - School of Regulation and Global Governance

Jonathan Bonnitcha

University of New South Wales

Date Written: November 8, 2018

Abstract

Investment treaties currently address two conceptually distinct economic problems. The first is dynamic inconsistency of host state policy – i.e. the possibility that a host state will offer attractive conditions to new foreign investment and then renege on the bargain once the investment has been made. The second is a broader problem that the host state may undervalue foreign investors’ interests when responding to new information throughout the life cycle of the investment.

There are three reasons to distinguish problems of dynamic inconsistency from problems of new information. First, the original economic and political justifications offered for these treaties were grounded in their ability to solve problems of dynamic inconsistency. Second, as we show in this paper, solving problems of dynamic inconsistency generally increases both host and source country welfare. In contrast, redressing a broader tendency for the host state to undervalue foreign investors’ welfare when responding to new information does not necessarily increase host country welfare. In other words, a tendency to undervalue foreign investors’ welfare is not a “problem” at all from a host country perspective. Third, as an empirical matter, there are doubts about whether foreign investors’ welfare is consistently undervalued within host state decision-making.

We propose a solution which maintains protection for investors from opportunistic/predatory actions by host states, while allowing host states the flexibility to change rules and regulations in response to new information about the social costs and benefits of an investment. Our solution comes in the form of an integrated liability rule and compensation standard that defines both when a state should be required to compensate an investor for adverse government action and how much compensation should be required.

Keywords: investment treaties; expropriation; regulatory change; compensation; dynamic inconsistency; hold up problem; new information; law and economics

JEL Classification: D60; F21; F63; K11; K33

Suggested Citation

Aisbett, Emma and Bonnitcha, Jonathan, Compensation under Investment Treaties – As if Host Interests Mattered (November 8, 2018). UNSW Law Research Paper No. 18-80. Available at SSRN: https://ssrn.com/abstract=3281334 or http://dx.doi.org/10.2139/ssrn.3281334

Emma Aisbett

ANU - School of Regulation and Global Governance ( email )

Canberra, Australian Capital Territory 2601
Australia

Jonathan Bonnitcha (Contact Author)

University of New South Wales ( email )

Kensington
High St
Sydney, NSW 2052
Australia

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