Bounded Rationality and the Diffusion of Modern Investment Treaties

Lauge N. Skovgaard Poulsen, Nuffield College, Oxford University

Abstract

Given the considerable sovereignty costs involved, the adoption of modern investment treaties by practically all developing countries presents somewhat of a puzzle. Based on a review of leading explanations of investment treaty diffusion, the article advances a new theory using behavioral economics insights on cognitive heuristics. In line with recent work on policy diffusion, it suggests that a bounded rationality framework has considerable potential to explain important and systematic variation in developing countries’ behavior in the investment regime. To illustrate the potential of this approach, the case of South Africa is studied in depth.