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Police Powers, Regulatory Takings and the Efficient Compensation of Domestic and Foreign Investors

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  • EMMA AISBETT
  • LARRY KARP
  • CAROL MCAUSLAND

Abstract

Modern international investment agreements have challenged the customary exclusion of public good regulations from being considered government ‘takings’ subject to compensation rules. Full compensation for regulatory takings can, however, lead to over‐investment and excessive entry in risky industries. An alternative is to ‘carve‐out’ apparently efficient regulation from compensation requirements. We design a carve‐out/compensation rule that induces efficient regulation and firm‐level investment even when the regulator suffers fiscal illusion and has private information about the social benefit from regulation. We also show that a carve‐out reduces the subsidy to risky industry implicit in compensation rules, and thus mitigates the entry problem.

Suggested Citation

  • Emma Aisbett & Larry Karp & Carol Mcausland, 2010. "Police Powers, Regulatory Takings and the Efficient Compensation of Domestic and Foreign Investors," The Economic Record, The Economic Society of Australia, vol. 86(274), pages 367-383, September.
    • Handle: RePEc:bla:ecorec:v:86:y:2010:i:274:p:367-383
    DOI: 10.1111/j.1475-4932.2009.00616.x
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    Cited by:

    1. Guttorm Schjelderup & Frank Stähler, 2021. "Investor‐state dispute settlement and multinational firm behavior," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 1013-1024, September.
    2. Aisbett, Emma & Busse, Matthias & Nunnenkamp, Peter, 2016. "Bilateral investment treaties do work: Until they don't," Kiel Working Papers 2021, Kiel Institute for the World Economy (IfW Kiel).
    3. Aisbett Emma & Karp Larry & McAusland Carol, 2010. "Compensation for Indirect Expropriation in International Investment Agreements: Implications of National Treatment and Rights to Invest," Journal of Globalization and Development, De Gruyter, vol. 1(2), pages 1-35, December.
    4. Horn, Henrik & Tangerås, Thomas, 2021. "Economics of international investment agreements," Journal of International Economics, Elsevier, vol. 131(C).
    5. Horn, Henrik, 2018. "Investor-State vs. State-State Dispute Settlement," Working Paper Series 1248, Research Institute of Industrial Economics, revised 20 Feb 2019.
    6. Brada, Josef C. & Chen, Chunda & Jia, Jingyi & Kutan, Ali M. & Perez, M. Fabricio, 2022. "Value creation and value destruction in investor-state dispute arbitration," Journal of Multinational Financial Management, Elsevier, vol. 63(C).
    7. Horn, Henrik & Tangerås, Thomas, 2016. "Economics and Politics of International Investment Agreements," Working Paper Series 1140, Research Institute of Industrial Economics.
    8. Kohler, Wilhelm & Stähler, Frank, 2019. "The economics of investor protection: ISDS versus national treatment," Journal of International Economics, Elsevier, vol. 121(C).
    9. Emma Aisbett, 2010. "Powerful Multinational or Persecuted Foreigners: ‘Foreignness’ and Influence over Government," CEPR Discussion Papers 638, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    10. Konrad, Kai A., 2017. "Large investors, regulatory taking and investor-state dispute settlement," European Economic Review, Elsevier, vol. 98(C), pages 341-353.
    11. Ossa, Ralph & Staiger, Robert W. & Sykes, Alan O., 2023. "Standing in international investment and trade disputes," Journal of International Economics, Elsevier, vol. 145(C).
    12. Rod Falvey & Neil Foster-McGregor, 2017. "Heterogeneous effects of bilateral investment treaties," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(4), pages 631-656, November.
    13. Ronit Levine-Schnur & Gideon Parchomovsky, 2016. "Is the Government Fiscally Blind? An Empirical Examination of the Effect of the Compensation Requirement on Eminent-Domain Exercises," The Journal of Legal Studies, University of Chicago Press, vol. 45(2), pages 437-469.
    14. Horn, Henrik & Norbäck, Pehr-Johan, 2018. "A Non-Technical Introduction to Economic Aspects of International Investment Agreements," Working Paper Series 1250, Research Institute of Industrial Economics.

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