An optimal investor-state dispute settlement mechanism

Abstract Many investment treaties include investor-state dispute settlement (ISDS) provisions which are supposed to protect a foreign investor against opportunistic behavior of host country. This paper scrutinizes the optimal design ISDS that solve holdup problem. It shows an efficient protection mechanism requires arbitrator as established in treaties. However, this does neither have learn nor evaluate circumstances dispute. Furthermore, any compensation from government should not be based on reductions profits but country’s welfare effects.