Revealing Options

90 Pages Posted: 20 Sep 2004

See all articles by Lee Anne Fennell

Lee Anne Fennell

University of Chicago - Law School


Legal scholars are beginning to explore how the options template, borrowed from finance, can be applied to legal problems outside the realm of finance. This article uses the options framework to add a new, intermediate entitlement form to the property rule/liability rule schema pioneered by Guido Calabresi and Douglas Melamed. Building on a fascinating but underused literature on self-assessed valuation mechanisms, I propose an entitlement form that would require entitlement-holders to create options for others (or their own future selves). These entitlements subject to self-made options or ESSMOs are capable of powerfully and elegantly addressing one of the most intractable problems in property theory - unknown subjective valuations.

By requiring a party to package her subjective valuation in the form of an option - that is, a revealing option - the ESSMO dodges the primary problems associated with property rules and liability rules while harnessing advantages of each. Like a liability rule, the ESSMO extends to other parties the right to engage in a unilateral purchase of the entitlement at an established price. Like a property rule, the ESSMO gives the entitlement holder control over the transfer price, thus protecting her idiosyncratic subjective value in the entitlement. Unlike a property rule, however, the ESSMO makes the entitlement-holder's stated valuation binding throughout an option period, and incorporates other features designed to elicit honest valuations.

The real payoff of this approach comes in complex, dynamic, multi-party commons settings. Extending my earlier work on commons and anticommons problems, I show how the ESSMO can transform environmental controls, land conservation, and aesthetic controls in private neighborhoods. I also illustrate how revealing options can address intertemporal collective action problems in institutions, as well as in individuals (such as the smoker who wishes to quit).

Keywords: property rules, liability rules, options, valuation, commons, anticommons

Suggested Citation

Fennell, Lee Anne, Revealing Options. Harvard Law Review, Vol. 118, No. 5, March 2005; U Illinois Law & Economics Research Paper No. LE04-005. Available at SSRN:

Lee Anne Fennell (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-0603 (Phone)

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