Abstract

This paper explains why the use of mandatory dispute resolution clauses is the exception rather than the rule in international agreements. On one hand, these clauses increase the sanction for violation of the agreement and thereby increase the probability that the parties will comply. On the other hand, dispute resolution clauses impose a loss on the parties when violations occur. 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 paper develops a series of predictive and normative results based on the trade-off. For example, dispute resolution clauses are more likely in low-stakes than high-stakes agreements, in multilateral rather than bilateral agreements, and when tribunals are more accurate. The paper also offers support for the view that money damages (or other zero-sum transfers) should be encouraged in international dispute resolution.

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