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Real Options Theory for Law Makers

  • Bruno Deffains

    (University Paris 10, CNRS, EconomiX)

  • Marie Obidzinski

    (Université de Besançon, CRESE)

The formulation of legal rules is a challenging issue for law makers. Tradeoffs 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 law makers to obtain more information. Therefore, the lower the degree of precision of the law, the shorter the delay.

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2009014.

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Length: 24
Date of creation: 01 Mar 2009
Date of revision:
Handle: RePEc:ctl:louvre:2009014
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  1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474, 01-2013.
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