Compensation for Indirect Expropriation in International Investment Agreements: Implications of National Treatment and Rights to Invest : Journal of Globalization and Development

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Journal of Globalization and Development

Ed. by Stiglitz, Joseph / Emran, M. Shahe / Guzman, Martin / Jayadev, Arjun / Ocampo, José Antonio / Rodrik, Dani

Compensation for Indirect Expropriation in International Investment Agreements: Implications of National Treatment and Rights to Invest

Emma Aisbett1 / Larry Karp2 / Carol McAusland3

1Australian National University

2University of California, Berkeley and Giannini Foundation

3University of British Columbia

Citation Information: Journal of Globalization and Development. Volume 1, Issue 2, ISSN (Online) 1948-1837, DOI: 10.2202/1948-1837.1133, December 2010

Publication History

Published Online:
2010-12-27

International investment agreements allow investors to bring compensation claims when their investments are hurt by new regulations. This requirement that host governments compensate for indirect expropriation helps solve post-investment moral hazard problems such as hold-ups, thereby helping to prevent inefficient over-regulation and encouraging foreign investment. However, when the social or environmental harm of a project is uncertain pre-investment, compensation requirements can interact with National Treatment clauses in a manner that reduces host government welfare and makes them less likely to admit investment. A police powers carve-out from the definition of compensable expropriation can be Pareto-improving and increase foreign investment.

Keywords: foreign direct investment; regulatory takings; expropriation; international investment agreements; National Treatment; environment

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