Contingent Institutions: The Reputational Impact of Investor-State Disputes

Abstract

To what extent do alleged violations of international commitments damage state reputation? This paper explores this question with specific reference to investor-state disputes arising under the protection of international investment agreements. Existing theory assumes that institutionalization of international commitments raises the ex post costs of defection, including reputational damage, thereby creating strong incentives for state compliance. We modify this expectation by arguing that the reputational consequences of treaty violations are contingent on institutional rules and information flows. Drawing on a replication of prior research linking investor-state disputes with reduced FDI as well as an original analysis of their impact on investment reputation, we show that the impact of investor-state disputes has been relatively marginal over the 1987-2011 time period, with reputational effects only beginning to materialize in recent years. This temporal variation reflects changes in the rules governing the transparency of international arbitral tribunals as well as expanded media coverage of investment disputes. The central implication of these findings for the broader body of literature on international institutions is that reputational mechanisms for effective treaty enforcement cannot be taken as given but are heavily contingent on institutional design and associated information costs.