Real Options Theory for Law Makers

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.