Real Options Theory for Law Makers
Recherches Economiques de Louvain - Louvain Economic Review, Vol. 75, No. 1, 2009
27 Pages Posted: 3 Mar 2008 Last revised: 9 Jul 2010
Date Written: December 1, 2007
Abstract
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.
Keywords: Degree of precision, flexibility, obsolescence, rulemaking
JEL Classification: C61, G12, K00, K40
Suggested Citation: Suggested Citation
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