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International Investment Law Between Commitment and Flexibility: A Contract Theory Analysis

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  • Anne van Aaken

Abstract

This article analyzes international investment protection law by using tools of economic contract theory. Contract theory has been applied to international trade law, but investment law has not yet been analyzed under this methodology. International Investment Agreements may be interpreted as a mechanism for overcoming commitment problems between investor and host state in order to generate mutual benefits. States trade credibility for sovereignty as international investment law restricts the regulatory conduct of states to an unusual extent, subject to control through compulsory international adjudication. A well-known problem in contract theory is how to deal with uncertainty. Changing conditions are a prevalent characteristic in investment law. Contract theory finds that too strict and inflexible contracts may impair the joint surplus of the contracting parties. Thus, a trade-off arises between ex ante commitment on the one hand and flexibility ex post in order to uphold the efficiency of the contract on the other. Those problems become virulent in unforeseen crises, such as financial or economic ones. This article analyzes commitment and flexibility mechanisms in international investment protection law and proposes to use similar mechanisms as in WTO law to design more optimal contracts. Oxford University Press 2009, all rights reserved, Oxford University Press.

Suggested Citation

  • Anne van Aaken, 2009. "International Investment Law Between Commitment and Flexibility: A Contract Theory Analysis," Journal of International Economic Law, Oxford University Press, vol. 12(2), pages 507-538, June.
    • Handle: RePEc:oup:jieclw:v:12:y:2009:i:2:p:507-538
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    File URL: http://hdl.handle.net/10.1093/jiel/jgp022
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    Cited by:

    1. Claire Cutler, 2013. "Human Rights Promotion through Transnational Investment Regimes: An International Political Economy Approach," Politics and Governance, Cogitatio Press, vol. 1(1), pages 16-31.
    2. Dantas, Eva & Meyer, Niclas & Stehnken, Thomas, 2013. "Growing outflows of technology-driven foreign direct investment from emerging economies and the implications for the international investment regime," Discussion Papers "Innovation Systems and Policy Analysis" 38, Fraunhofer Institute for Systems and Innovation Research (ISI).
    3. Yoram Z. Haftel & Alexander Thompson, 2018. "When do states renegotiate investment agreements? The impact of arbitration," The Review of International Organizations, Springer, vol. 13(1), pages 25-48, March.
    4. Florencia Montal & Carly Potz-Nielsen & Jane Lawrence Sumner, 2020. "What states want: Estimating ideal points from international investment treaty content," Journal of Peace Research, Peace Research Institute Oslo, vol. 57(6), pages 679-691, November.

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