5 The Microeconomics of Investment Treaties

Subject(s):

Definition of investment — Investor — Treaties, interpretation — Treaty provisions

This chapter surveys the impact of investment treaties on decision-making at the firm and government levels. The focus is on whether investment treaties’ influence on the decisions of firms and states leads to improvements in efficiency. The first section examines the ‘hold-up’ problem, which provides the most influential and coherent microeconomic justification for the inclusion of investment protection provisions in investment treaties. The second section explores the problem of ‘fiscal illusion’ in host state decision-making, which could result in ‘over-regulation’ of foreign investment in the absence of an investment treaty. The third section considers whether investment treaties solve problems of discrimination against foreign investors, as well as the possibility that investment treaties lead to discrimination in favour of foreign investors.