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Real Options Theory for Law Makers

  • Marie Obidzinski

    ()

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

  • Bruno Deffains

    (BETA - Bureau d'Economie Théorique et Appliquée - CNRS - Centre National de la Recherche Scientifique - UL - Université de Lorraine - Université de Strasbourg)

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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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 in Recherches Economiques de Louvain - Louvain economic review, De Boeck Université, 2009, 75 (1), pp.93-117. <10.3917/rel.751.0093>
Handle: RePEc:hal:journl:hal-00447170
DOI: 10.3917/rel.751.0093
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00447170
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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  1. William M. Landes & Richard A. Posner, 1976. "Legal Precedent: A Theoretical and Empirical Analysis," NBER Working Papers 0146, National Bureau of Economic Research, Inc.
  2. 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.
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  13. Arun S. Malik, 1990. "Avoidance, Screening and Optimum Enforcement," RAND Journal of Economics, The RAND Corporation, vol. 21(3), pages 341-353, Autumn.
  14. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
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  16. 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.
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  18. 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.
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