Investing in Policy Reform
Sunk costs and uncertainty characterize many public policy changes, as well as private investments. The Dixit-Pindyck theory of investment under uncertainty can then be applied to policy reforms, generating a positive option value to delaying a policy reform. The potential to adjust enforcement provides an additional lever for policy makers, as examined here with respect to enforcing a drug prohibition. Control over enforcement can make it optimal to further delay ending a drug ban. A de jure drug legalization is then likely to follow de facto liberalization, as enforcement effort is first reduced.
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Volume (Year): 155 (1999)
Issue (Month): 4 (December)
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