Political Risk and Realpolitik: The Politics of Compensation for Expropriation

Abstract

How do powerful countries protect their investors abroad? Protecting investment across borders is problematic without an international enforcer, but like other phenomena that occur in a state of anarchy, order is still possible. For decades, scholars have developed theories to explain why governments expropriate. Seldom is it pointed out however that in the majority of cases, governments give back, often in large amounts. This paper will be the first to offer a general theory of the politics and economics of why governments pay compensation for expropriation. It argues that the role of state power in protecting international property rights is revealed if we look at the architecture surrounding compensation. The paper aims to convince scholars in political economy that a political and economic analysis of international property rights cannot be achieved by simply looking at the occurrence of contract breaches - it must also account for attempts to compensate for those breaches. Bridging insights from international law, political science and economics, the project contributes the following: attention to an understudied research vein in the political risk literature; an explanation about why states compensate; hypotheses tested with novel data from the political risk insurance industry; and a game theoretic model of international investment which includes different mechanisms for compliance, and expands the decision to expropriate to include the prospect of compensation.