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Real Options Theory for Law Makers

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  • Marie Obidzinski

    ()
    (CRESE - Centre de REcherches sur les Stratégies Economiques - Université de Franche-Comté : EA)

  • Bruno Deffains

    (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université Louis Pasteur - Strasbourg I)

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    Abstract

    The formulation of legal rules is a challenging issue for lawmakers. Trade-offs are inevitable between providing more guidance by specific rules and enlarging the scope by general rules. Using real options theory we show that the degree of precision should be considered as a degree of flexibility which increases the value of the text. Thus, we derive a normative principle for a draftsman to choose between rules versus standards and to decide when the law should be enacted. In highly innovating environments, delaying the enactment allows lawmakers to obtain more information. Therefore, the lower the degree of precision of the law, the shorter the delay.

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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number hal-00447170.

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    Date of creation: Jan 2009
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    Publication status: Published, Recherches Economiques de Louvain, 2009, 75, 1, 93-117
    Handle: RePEc:hal:journl:hal-00447170

    Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00447170/en/
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    Related research

    Keywords: degree of precision ; flexibility ; obsolescence ; rulemaking;

    References

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    1. William M. Landes & Richard A. Posner, 1975. "The Independent Judiciary in an Interest-Group Perspective," NBER Working Papers 0110, National Bureau of Economic Research, Inc.
    2. Johnston, Jason Scott, 1995. "Bargaining under Rules versus Standards," Journal of Law, Economics and Organization, Oxford University Press, vol. 11(2), pages 256-81, October.
    3. Arun S. Malik, 1990. "Avoidance, Screening and Optimum Enforcement," RAND Journal of Economics, The RAND Corporation, vol. 21(3), pages 341-353, Autumn.
    4. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1999. "Informal Authority in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 56-73, April.
    5. Landes, William M & Posner, Richard A, 1976. "Legal Precedent: A Theoretical and Empirical Analysis," Journal of Law and Economics, University of Chicago Press, vol. 19(2), pages 249-307, August.
    6. Isaac Ehrlich & Richard A. Posner, 1974. "An Economic Analysis of Legal Rulemaking," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 257-286, January.
    7. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
    8. Johnson, Herb, 1987. "Options on the Maximum or the Minimum of Several Assets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(03), pages 277-283, September.
    9. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
    10. Paul G. Mahoney & Chris William Sanchirico, 2005. "General and Specific Legal Rules," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(2), pages 329-, June.
    11. Bar-Gill Oren, 2005. "Pricing Legal Options: A Behavioral Perspective," Review of Law & Economics, De Gruyter, vol. 1(2), pages 204-240, September.
    12. Robert A. Jones & Joseph M. Ostroy, 1979. "Flexibilty and Uncertainty," UCLA Economics Working Papers 163, UCLA Department of Economics.
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