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Working Papers / Global Economics: Trade Investment and Development


Economics and Politics of International Investment Agreements

Author(s): Henrik Horn and Thomas Tangerås

Topic(s): Trade, Investment and International Cooperation //

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We analyze the optimal design and implications of international investment agreements. These are ubiquitous, potent and heavily criticized state-to-state treaties that compensate foreign investors against host country policies. Optimal agreements cause national but not global underregulation (“regulatory chill”). The incentives to form agreements and their distributional consequences depend on countries’ unilateral commitment possibilities and the direction of investment flows. Foreign investors benefit from agreements between developed countries at the expense of the rest of society, but not in the case of agreements between developed and developing countries.