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Bounded Rationality and Economic Diplomacy:
The Politics of Investment Treaties in Developing Countries

​Cambridge University Press 2015

​​Winner of the International Studies Association's inaugural Best Book Award in International Political Economy.

Modern investment treaties give private arbitrators power to determine whether governments should pay compensation to foreign investors for a wide range of sovereign acts. In recent years, particularly developing countries have incurred significant liabilities from investment treaty arbitration, which begs the question why they signed the treaties in the first place. Through a comprehensive and timely analysis, this book shows that governments in developing countries typically overestimated the economic benefits of investment treaties and practically ignored their risks. Rooted in insights on bounded rationality from behavioural psychology and economics, the analysis highlights how policy-makers often relied on inferential shortcuts when assessing the implications of the treaties, which resulted in systematic deviations from fully rational behaviour. This not only sheds new light on one of the most controversial legal regimes underwriting economic globalization but also provides a novel theoretical account of the often irrational, yet predictable, nature of economic diplomacy.

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​Endorsements:

Well before the current hype in Europe over investor-state dispute settlement, Poulsen pioneered the view that many countries signed up to investment protection treaties in less than rational ways. This book provides careful, country-specific evidence in support, with eye-opening stories from across the world, ranging from Pakistan and Ghana to the Czech Republic, Costa Rica and South Africa. Countries simply assumed the economic benefits of investment treaties and underestimated the possibility and costs of legal claims. World Bank and UN officials promoted the treaties and so did Western lawyers and advisors. Debunking the rational premise of much of the academic scholarship, this book should be compulsory reading for a new generation of policymakers and scholars alike, if only to avoid the mistakes of the past and find better ways to address today's increasingly complex challenges of economic diplomacy.
Professor Joost Pauwelyn, Graduate Institute, Geneva

BITs don’t have to be boring! Lauge Poulsen has developed a simple yet elegant framework based on bounded rationality to explain why many less developed countries have made rationally foolish choices when signing bilateral investment treaties. By slightly relaxing the strong assumptions of rationality, and combining it with careful in-depth case analysis, he provides a compelling account of the bilateral investment treaty regime and its sometimes perverse consequences.
Professor Duncan Snidal, Nuffield College, University of Oxford

In explaining why developing countries signed on to investment treaties that were arguably not in their interests, Poulsen adds greatly to Graham Allison’s ground-breaking analysis of the Cuban Missile Crisis so that we can better understand how government decision-making - in rich as well as poor countries - works in practice.
Professor Louis T. Wells, Emeritus, Harvard Business School
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Lauge Poulsen makes a truly innovative contribution to political economy by using a rich set of insights from cognitive psychology and behavioral economics to explain the spread and impact of bilateral investment treaties. His thorough statistical and qualitative research convincingly demonstrates the superiority of this bounded-rationality theory over conventional rationalist accounts.
Professor Kurt Weyland, Department of Government, University of Texas, Austin

Reviews:

British Yearbook of International Law, 2018.

European Journal of International Law, 28(1) 2017

International Affairs, 92 (3) 2016

Journal of International Economic Law, 19(3) 2016

Journal of Politics, 78(4) 2016

Journal of World Investment and Trade, 17(5) 2016

Perspectives on Politics, 15(1) 2017

Indian Journal of International Law, 2018



Media:

Investment Treaty News Quarterly, 16 May 2016

Columbia-Oxford Youtube Series on New Thinking on Investment Treaties, 1 February 2016