Diffusion of Bilateral Investment Treaties 823 give host governments a competitive edge in attracting capital30 if there are other- wise doubts about their willingness to enforce contracts fairly.Accordingly,gov- ernments with little inherent credibility are more likely to sign BITs than are governments known for their fair treatment of foreign capital.The result is a com- petitive dynamic among potential hosts to reduce the risks and enhance the prof- itability of investing. BITs as a Credible Commitment Governments may have many motives to sign a BIT,but the most significant is to make a credible commitment to treat foreign investors fairly.BITs allow govern- ments to make credible commitments because they raise the ex post costs of non- compliance above those that might be incurred in the absence of the treaty.They do this by (1)clarifying the commitment,(2)explicitly involving the home country's government,and (3)enhancing enforcement.31 BITs raise ex post costs of reneging on contracts by reducing the ambiguity of the host government's obligations.BITs are much more precise than customary international law in this area.They also provide a broader legal framework in which to interpret specific contractual obligations.Precision removes potential avenues of plausible deniability,making it clearer to a broader range of audiences (domes- tic audiences,other foreign investors,other governments),that an obligation has been disregarded.Clear violations imply a much greater reputational cost than do actions not clearly barred by law.32 The second way BITs raise ex post costs of reneging is by involving the investor's government as a treaty party.BITs are negotiated between sovereign states.State- to-state legal arrangements implicate the interests of the home government more directly than do simple investment contracts between private parties and host gov- ernments.The home government has an interest in broader principles of good- faith treaty observance.Treatment that violates a BIT qualifies as a breach of the fundamental principle of international law:pacta sunt servanda(treaties are to be 30.There is debate in the literature about the impact of BITs on investment flows.The small num- ber of papers on the subject have generated inconsistent results.The most recent and sophisticated study of which we are aware,however,concludes that BITs do,indeed increase FDI and serve as a substitute for good domestic institutional quality:see Neumayer and Spess 2005.Other relevant stud- ies include Hallward-Driemeier 2003;Tobin and Rose-Ackerman 2003;and UNCTAD 1998. 31.We cast our argument in the credible commitments framework,but our competition argument may be compatible with signaling theories as well.Some of the empirical implications would be dif- ferent than those we describe here,however.If a BIT is a signaling device,we would expect more reliable rather than less reliable property rights protectors to sign them.We might also expect less reliable governments to sign one treaty,rather than multiple treaties,since one should suffice to send the signal.Empirically,we tend to observe multiple signings per host,which leads us to frame the issue as one of credible commitments rather than costly signals that reveal type.Both frameworks could,however,explain a competitive dynamic to sign BITs. 32.See Abbott et al.2000;Lipson 1991;and Guzman 2002.give host governments a competitive edge in attracting capital30 if there are other￾wise doubts about their willingness to enforce contracts fairly+ Accordingly, gov￾ernments with little inherent credibility are more likely to sign BITs than are governments known for their fair treatment of foreign capital+ The result is a com￾petitive dynamic among potential hosts to reduce the risks and enhance the prof￾itability of investing+ BITs as a Credible Commitment Governments may have many motives to sign a BIT, but the most significant is to make a credible commitment to treat foreign investors fairly+ BITs allow govern￾ments to make credible commitments because they raise the ex post costs of non￾compliance above those that might be incurred in the absence of the treaty+ They do this by ~1! clarifying the commitment, ~2! explicitly involving the home country’s government, and ~3! enhancing enforcement+ 31 BITs raise ex post costs of reneging on contracts by reducing the ambiguity of the host government’s obligations+ BITs are much more precise than customary international law in this area+ They also provide a broader legal framework in which to interpret specific contractual obligations+ Precision removes potential avenues of plausible deniability, making it clearer to a broader range of audiences ~domes￾tic audiences, other foreign investors, other governments!, that an obligation has been disregarded+ Clear violations imply a much greater reputational cost than do actions not clearly barred by law+ 32 The second way BITs raise ex post costs of reneging is by involving the investor’s government as a treaty party+ BITs are negotiated between sovereign states+ State￾to-state legal arrangements implicate the interests of the home government more directly than do simple investment contracts between private parties and host gov￾ernments+ The home government has an interest in broader principles of good￾faith treaty observance+ Treatment that violates a BIT qualifies as a breach of the fundamental principle of international law: pacta sunt servanda ~treaties are to be 30+ There is debate in the literature about the impact of BITs on investment flows+ The small num￾ber of papers on the subject have generated inconsistent results+ The most recent and sophisticated study of which we are aware, however, concludes that BITs do, indeed increase FDI and serve as a substitute for good domestic institutional quality; see Neumayer and Spess 2005+ Other relevant stud￾ies include Hallward-Driemeier 2003; Tobin and Rose-Ackerman 2003; and UNCTAD 1998+ 31+ We cast our argument in the credible commitments framework, but our competition argument may be compatible with signaling theories as well+ Some of the empirical implications would be dif￾ferent than those we describe here, however+ If a BIT is a signaling device, we would expect more reliable rather than less reliable property rights protectors to sign them+ We might also expect less reliable governments to sign one treaty, rather than multiple treaties, since one should suffice to send the signal+ Empirically, we tend to observe multiple signings per host, which leads us to frame the issue as one of credible commitments rather than costly signals that reveal type+ Both frameworks could, however, explain a competitive dynamic to sign BITs+ 32+ See Abbott et al+ 2000; Lipson 1991; and Guzman 2002+ Diffusion of Bilateral Investment Treaties 823