The Cost of Credibility: Explaining Resistance to Inter-State Dispute Resolution Mechanisms

Abstract

When states enter into an agreement the credibility of their commitment is undermined by the weakness of the international enforcement system. Including a mandatory dispute resolution provision in the agreement is one of the available strategies to improve the binding nature of an agreement and, therefore, increase the credibility and value of the agreement. As a matter of practice, however, states typically do not include mandatory dispute resolution provisions in their treaties and other agreements. International law scholars have long known this fact, but have not offered an explanation for this behavior that is consistent with what we know about contract and bargaining theory. This paper explains why the use of mandatory dispute resolution provisions is the exception rather than the rule in inter-state agreements. When states violate an international commitment, they face a loss in the form of direct sanctions or a reputational loss. These sanctions can be increased through the use of a dispute resolution clause. Both direct and reputational sanctions represent a joint loss for the parties to an agreement. In the event of a breach, therefore, the parties are better off without a dispute resolution provision. On the other hand, by increasing the sanction for a violation of international law, a dispute resolution clause increases the likelihood of compliance. States, therefore, must balance the credibility and compliance benefits of a mandatory dispute resolution provision against the joint costs imposed by those provisions in the event of a violation. The analysis generates a series of results. It is shown that dispute resolution clauses are more likely when rates of compliance are high even in the absence of such clauses, when the marginal impact of the clause on compliance is large, and when the parties to the agreement face similar ex ante probabilities of breach. Dispute resolution clauses are also more likely in low stakes agreements than in high stakes ones, and in multilateral agreements rather than bilateral ones. On the normative side, the paper demonstrates that increasing the accuracy of tribunals will increase the use of dispute resolution clauses, even if the parties are risk neutral. It also offers support for the view that money damages (or other damages that take the form of transfers between the parties) should be encouraged.