Alan Sykes’ editorial comment, Economic “Necessity” in International Law, provides a multi-layered analysis of the defense of “necessity” in international investment disputes. Sykes’ main proposition is that the obligation to compensate investors for government measures prejudicing their investments during economic emergencies mitigates the risk of moral hazard and incentivizes States to “select the least expensive way to protect their interests (the optimal policy instrument).” Otherwise, he contends, “actors will take risks that imperil them to an excessive degree if they can save themselves by imposing costs on others.” Sykes nonetheless argues that payment of the compensation could be deferred in light of the emergency, and not be subject to market interest rates.

Applying economic theory to the analysis of economic “necessity” defenses in international law is highly desirable and Alan Sykes does a wonderful job in his editorial comment. As I have argued, the application of contract theory to international investment agreements (IIAs) helps us analyze their commitment and flexibility mechanisms. Sykes uses such an optimal contracting approach to address the problem of necessity in IIAs. I concur in broad terms with his conclusion, but I argue for greater contextualization in the application of the argument. Contract theory, although useful as a basic frame to address necessity claims, does not by itself fully encompass the economic analysis of law. Economic theory is diverse and not always unequivocal in its insights. Contract theory, as applied so far to international law, takes the state as a black box and assumes that the state will behave rationally. I will take a look into the box in order to analyze the incentives of different actors involved, including some of the beneficiaries of Iias—foreign investors.