Investor-State Arbitration: Economic and Empirical Perspectives

The investor-state arbitration system (“ISA”) was originally modelled on traditional commercial arbitration and was expected to deliver fast, good, and cheap decisions, especially in comparison to domestic court systems. Yet the ISA system has increasingly been criticized, especially by developing countries. Developing countries claim that the system is not cheap, that decision-making increasingly takes a long time, and that arbitrators are biased in favor of investors (often coming from developed countries in the global North) and against states from the developing South. Several developing states have even withdrawn from the ICSID Convention, which governs the settlement of disputes between investors and states through the institution of the same name.

This article provides an economic and an empirical perspective on ISA: It reviews the traditional Law and Economics arguments in favor of and against international commercial arbitration, analyzing to what extent the characteristics of ISA make ISA different than international commercial arbitration. Moreover, the article summarizes the rich empirical literature on the functioning of ISA, and it compares and synthesizes this empirical literature with Law and Economics theories. Based on both Law and Economics and the empirical literature, the article then analyzes existing suggestions for reforming the ISA system.