When Do States Believe in Treaties? Legalization, Commitment, and Institutional Externality

ABSTRACT Objective This study aims to elucidate the constraining power of international institutions by examining treaty externalities shaped by the interaction between two key factors: legalization and commitment. Methods To illustrate this theoretical possibility, I estimate a two‐way fixed effects model to pinpoint how varying levels of legalization and commitment impact aid flows within OECD‐non‐OECD bilateral investment treaties (BITs) from 1971 to 2012. Results I find clear and robust evidence that pledging the highest level of commitment to highly legalized BITs effectively reduces foreign aid from a capital‐exporting member to a capital‐importing member. Conclusion The finding substantiates that the externalities of international institutions can also be indicative of their constraining power.