Democracies cooperate more: even where it threatens to bite?

ABSTRACT

Estimating two-step selection models, we find that more democratic governments are more likely to conclude preferential trade agreements (PTAs) and to agree to stricter investment provisions related to pre-establishment national treatment and investor–state dispute settlement in PTAs. This is surprising when considering the potentially high costs of litigation.

KEYWORDS:

• Preferential trade agreements (PTA)
• investor-state dispute settlement
• national treatment
• democracy

JEL CLASSIFICATION:

• F13
• F42

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Neumayer, Nunnenkamp, and Roy (forthcoming) provide an exception, but they focus on BITs and do not cover the recent past when voter perceptions appear to have changed remarkably.

² For details, see the Working Paper version. https://www.ifw-members.ifw-kiel.de/publications/democracies-cooperate-more-2013-even-where-it-threatens-to-bite/kwp_2004.pdf (accessed 3 November 2015).

³ Note that each pair of partner countries enters twice to obtain unbiased estimates for variables that are not defined pairwise.

⁴ http://mgmt5.wharton.upenn.edu/henisz/_vti_bin/shtml.dll/POLCON/ContactInfo.html (accessed July 2015). Specifically, we draw on the variable POLCON which ranges from ‘0’ (no executive constraints) to ‘1’.

⁵ For the sake of brevity, the results for the selection equation are not shown here.

⁶ At the same time, close neighbours with a common border are less likely to conclude a PTA. A common religion and GATT/WTO membership are associated with a higher probability of a PTA.

⁷ The results in Table 1 are based on annual estimations of the selection equation. We obtained similar results with pooled estimation of the selection equation (not shown).

⁸ In addition, the validity of Dist as one of our exclusion variables is affected when focusing on ISDS.

⁹ Note that this increase is almost exclusively due to particularly strict ISDS provisions. The flat and largely overlapping curves in Fig. 2 reveal that few PTAs include weaker ISDS provisions.