The Political Economy of Investor-State Disputes

Abstract

Under what conditions are countries most (least) likely to become involved in international investment disputes? Building on the premise that this question cannot be addressed without reference to the incentives facing political leaders, this study develops a theory emphasizing the domestic factors that lead governments to opt for short-term political gains at the risk of being drawn into potentially costly processes of international dispute arbitration. The theory is assessed on the basis of an original database covering the full set of known treaty-based disputes registered at international arbitral tribunals over the 1987-2011 period. After controlling for variations in exposure to the risks of investment disputes, the results suggest that the willingness of leaders to discount the potential costs of investor-state dispute arbitration varies with leadership turnover, economic conditions, and domestic political institutions, with the relationship between political democracy and the probability of investment dispute involvement assuming a curvilinear form.