BITs and bargains: Strategic aspects of bilateral and multilateral regulation of foreign investment

Bilateral investment treaties (BITs) provide international standards for the protection of foreign investment. Andrew Guzman has argued that BITs represent a prisoner's dilemma for developing countries-they would have been better off operating under customary international law. We formalize and critique Guzman's claim and demonstrate that a prisoner's dilemma is not necessary to explain the developing countries' behavior. Instead, the optimal strategy for newly independent states may have been to reap a windfall gain by a temporary period of expropriation and then to use BITs to commit to respecting property tights to new foreign investments. Finally, we argue that a multilateral agreement on investment (MAI) is now unlikely because the widespread coverage of BITs has narrowed the achievable surplus of an MAI. (c) 2007 Elsevier Inc. All rights reserved.