Learning from Incredible Commitments: Evolution and Impact of Bilateral Investment Treaties

Ostensibly, BITs are the ideal international treaty. First, until just recently, they almost uniformly came with explicit dispute resolution mechanisms through which countries could face real costs for violation (Montt 2009). Second, the signing, ratification, and violation of them are easily accessible public knowledge. Thus countries presumably would face reputational costs for violating these agreements. Yet, these compliance devices have not dissuaded states from violating these agreements. Even more interestingly, in recent years, both developed and developing countries have moved towards modifying the investor-friendly provisions of these agreements. These deviations from the expectations of the credible commitment argument raise important questions about the field's assumptions regarding the ability of international treaties with commitment devices to effectively constrain state behavior.

Prenegotiation public commitment in domestic and international bargaining

We use a formal bargaining model to examine why, in many domestic and international bargaining situations, one or both negotiators make public statements in front of their constituents committing themselves to obtaining certain benefits in the negotiations. We find that making public commitments provides bargaining leverage, when backing down from such commitments carries domestic political costs. However, when the two negotiators face fairly similar costs for violating a public commitment, a prisoner's dilemma is created in which both sides make high public demands which cannot be satisfied, and both negotiators would be better off if they could commit to not making public demands. However, making a public demand is a dominant strategy for each negotiator, and this leads to a suboptimal outcome. Escaping this prisoner's dilemma provides a rationale for secret negotiations. Testable hypotheses are derived from the nature of the commitments and agreements made in equilibrium.