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Domestic Politics and Settlement in Investor-State Arbitration

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Settlement of high-stakes investor-state disputes may expose respondent state governments to public criticism for allegedly capitulating to foreign investors and large corporations, which gives rise to domestic-audience costs in the form of lower support for respondent state governments. The anticipated domestic-audience costs may in turn constrain states’ settlement behavior. Using the time left until the next election in the respondent state as a proxy for the size of anticipated domestic-audience costs, I find evidence that the probability of settlement decreases as elections approach in respondent states. This pattern appears to hold for both democracies and nondemocracies that hold elections. The findings suggest that pressure from domestic constituents causes respondent state governments to change their settlement behavior by not settling cases they otherwise would have settled or delaying settlement. These findings reveal potential inefficiencies arising from domestic political influences on states’ settlement behavior.

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