Diffusion of Bilateral Investment Treaties 825 Competitive BIT Signings:Logic and Implications In the previous section we argued that BITs allow governments to credibly com- mit themselves to protect investors'property rights.The ability to do so lowers risks and increases expected returns to investment.If this is the case,BITs can be a mechanism-such as favorable tax treatment,lower wages,and efficient infrastructure-for making a jurisdiction a more attractive place in which to invest. As with these other mechanisms,committing to a BIT involves costs for the host government.We characterize these as"sovereignty costs."They are the costs any government pays when it negotiates,ratifies,and complies with an investment treaty. We would include here the political costs of assembling a coalition in support of foreign investors'rights,as well as the costs associated with giving up a broad range of policy instruments relevant to domestic social or developmental purposes (taxation,regulation,performance requirements,property seizure,and currency and capital restrictions).Most striking are the sovereignty costs associated with the delegation of adjudicative authority:virtually any legal change or rule that affects foreign investors is potentially subject to review by a foreign tribunal.The decision to sign a BIT always involves an assessment by the host of whether the expected benefit of attracting an additional increment of foreign capital outweighs these costs.In many cases,the answer is no.In this section,we discuss the con- ditions under which the expected benefits for a particular government might out- weigh these sovereignty costs. BITs can attract capital from two broad resource pools.First,they can shift resources from consumption or domestic investment,effectively stimulating new international capital investments that would not have been made absent the treaty. Second,and more importantly for our theory,BITs can redirect international capital flows from one venue to another.A BIT gives the host signatory a "repu- tational advantage"over otherwise comparable rivals in the competition for(re)dis- tribution of an existing investment pool.37 The possibility of investment diversion means that governments may have competitive reasons to implement BITs.It is the ability of a BIT-or at a minimum,its perceived ability-to give one country an advantage over other similarly situated countries in the competition for capital that we hypothesize as provoking many BIT signings.38 The strategic structure we are describing creates serious collective-action prob- lems among potential host countries.Collectively,they might be better off resist- ing the demands of investors (avoiding the sovereignty costs described above), but individually it is rational to sign in hopes of stimulating capital inflows.In recognition of this dynamic,one finds cases of regional attempts to coordinate host resistance.In the Caribbean,for example,collective efforts have been made 37.This redistributive effect contrasts with customary international law,under which all potential hosts have the same obligations and enjoy the same benefits. 38.Guzman 1998 provides a more complete discussion of the potential impact of competition on BITs.Competitive BIT Signings: Logic and Implications In the previous section we argued that BITs allow governments to credibly com￾mit themselves to protect investors’ property rights+ The ability to do so lowers risks and increases expected returns to investment+ If this is the case, BITs can be a mechanism—such as favorable tax treatment, lower wages, and efficient infrastructure—for making a jurisdiction a more attractive place in which to invest+ As with these other mechanisms, committing to a BIT involves costs for the host government+ We characterize these as “sovereignty costs+” They are the costs any government pays when it negotiates, ratifies, and complies with an investment treaty+ We would include here the political costs of assembling a coalition in support of foreign investors’ rights, as well as the costs associated with giving up a broad range of policy instruments relevant to domestic social or developmental purposes ~taxation, regulation, performance requirements, property seizure, and currency and capital restrictions!+ Most striking are the sovereignty costs associated with the delegation of adjudicative authority: virtually any legal change or rule that affects foreign investors is potentially subject to review by a foreign tribunal+ The decision to sign a BIT always involves an assessment by the host of whether the expected benefit of attracting an additional increment of foreign capital outweighs these costs+ In many cases, the answer is no+ In this section, we discuss the con￾ditions under which the expected benefits for a particular government might out￾weigh these sovereignty costs+ BITs can attract capital from two broad resource pools+ First, they can shift resources from consumption or domestic investment, effectively stimulating new international capital investments that would not have been made absent the treaty+ Second, and more importantly for our theory, BITs can redirect international capital flows from one venue to another+ A BIT gives the host signatory a “repu￾tational advantage” over otherwise comparable rivals in the competition for ~re!dis￾tribution of an existing investment pool+ 37 The possibility of investment diversion means that governments may have competitive reasons to implement BITs+ It is the ability of a BIT—or at a minimum, its perceived ability—to give one country an advantage over other similarly situated countries in the competition for capital that we hypothesize as provoking many BIT signings+ 38 The strategic structure we are describing creates serious collective-action prob￾lems among potential host countries+ Collectively, they might be better off resist￾ing the demands of investors ~avoiding the sovereignty costs described above!, but individually it is rational to sign in hopes of stimulating capital inflows+ In recognition of this dynamic, one finds cases of regional attempts to coordinate host resistance+ In the Caribbean, for example, collective efforts have been made 37+ This redistributive effect contrasts with customary international law, under which all potential hosts have the same obligations and enjoy the same benefits+ 38+ Guzman 1998 provides a more complete discussion of the potential impact of competition on BITs+ Diffusion of Bilateral Investment Treaties 825