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Real Options Theory for Law Maker

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Author Info
Marie Obidzinski
Bruno Deffains
Abstract

In rapidly changing areas of law, the writing of rules is a challenging issue for lawmakers. Obsolescence impede law to capture the objective of an underlying policy. The legislator, the judge and the regulator are considered as producers of law who have to decide whether or not to invest in a particular type of law. In order to get more information on the context, lawmakers may also choose to wait before investing in law. Using the real options framework, we show that the degree of precision should be considered as a degree of flexibility of legal rules and we describe how it affects the value of the investment. We then analyze the trade-off between waiting and reducing the degree of precision and we show that the degree of precision of legal rules positively affects the value of waiting in lawmaking.

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Paper provided by Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg in its series Working Papers of BETA with number 2006-04.

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Date of creation: 2006
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Handle: RePEc:ulp:sbbeta:2006-04

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Related research
Keywords: Obsolescence; Rulemaking; Degree of Precision; Real Options.;

Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
K00 - Law and Economics - - General - - - General (including Data Sources and Description)
K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General

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References listed on IDEAS
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  1. 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.
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  2. William M. Landes & Richard A. Posner, 1976. "Legal Precedent: A Theoretical and Empirical Analysis," NBER Working Papers 0146, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring. [Downloadable!] (restricted)
  4. Francesco Parisi & Vincy Fon & Nita Ghei, 2004. "The Value of Waiting in Lawmaking," European Journal of Law and Economics, Springer, vol. 18(2), pages 131-148, September. [Downloadable!] (restricted)
  5. Pistor, Katharina & Xu, Cheng-Gang, 2003. "Law Enforcement under Incomplete Law: Theory and Evidence from Financial Market Regulation," CEPR Discussion Papers 3788, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November. [Downloadable!] (restricted)
  7. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144. [Downloadable!] (restricted)
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  8. Peter-Jan Engelen, 2004. "Criminal Behavior: A Real Option Approach With an Application to Restricting Illegal Insider Trading," European Journal of Law and Economics, Springer, vol. 17(3), pages 329-352, May. [Downloadable!] (restricted)
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