International Substitutes for Domestic Institutions: Bilateral Investment Treaties and Governance

Abstract

This paper concerns the increasing use of international commitment devices by developing countries. These devices include bilateral investment treaties, international arbitration, and multilateral trade commitments. The conventional wisdom is that such devices help to remedy local institutional deficiencies. Using an empirical analysis of bilateral investment treaties, this paper argues that, under some circumstances, international devices may be substitutes for local institutions and lead to reductions in governance quality. The presence of such international substitutes may explain the intractability of governance indicators in developing countries.