Legislate Today or Wait Until Tomorrow? An Investment Approach to Lawmaking

Journal of Public Finance and Public Choice, Vol. 23, pp. 19-42, 2005

Reprinted in LEGAL ORDERINGS AND ECONOMIC INSTITUTIONS, F. Cafaggi, A. Nicita and U. Pagano, eds., pp. 84-102, Routledge, 2007

Minnesota Legal Studies Research Paper No. 07-11

37 Pages Posted: 20 Apr 2007 Last revised: 11 Feb 2009

See all articles by Francesco Parisi

Francesco Parisi

University of Minnesota - Law School; University of Bologna

Nita Ghei

affiliation not provided to SSRN

Abstract

The process of implementing new laws in an environment of social change shares many characteristics with the process of making investment decisions under uncertainty. In any society that is not totally static, the law maker faces uncertainty about its evolution. Thus, the lawmaker cannot know with certainty what the appropriate law will be in the future, and therefore cannot know with certainty what the future stream of benefits from the law will be. In addition, implementing a new law necessitates the outlay of resources in formulating and enforcing the law, just as investment in a new project does. The costs of implementing a new law are largely sunk, and irreversible. That is, the costs of implementing the law cannot be recovered if the law turns out to be inappropriate in any way. Thus, the lawmaker faces a decision akin to an irreversible investment under uncertainty. Timing of the investment is therefore a critical issue for irreversible investments. When the lawmaker chooses to invest in the new law, he gives up the option to wait to implement the law at some future time. This option is the opportunity cost of investing today. At the same time, there is a cost in delaying the implementation of new laws, due to the decreasing effectiveness of the old laws in the changing social environment. That is, there is an "opportunity benefit" in investing today. In determining the optimal timing of adoption of new laws, the value of the option of waiting must be taken into account. We present a formal model drawn from the investment literature to demonstrate the value of waiting, and discuss its implications in the context of two real world legislative problems, environmental laws and privacy regulation. In both cases, there might be a cost in delaying investment in new laws, in that the damage to the environment or privacy could be irreversible. On the other hand, the benefits of the laws are hard to estimate. In addition, compliance costs might be very large, and the value of waiting correspondingly important in the decision to invest in lawmaking.

Suggested Citation

Parisi, Francesco and Ghei, Nita, Legislate Today or Wait Until Tomorrow? An Investment Approach to Lawmaking. Journal of Public Finance and Public Choice, Vol. 23, pp. 19-42, 2005, Reprinted in LEGAL ORDERINGS AND ECONOMIC INSTITUTIONS, F. Cafaggi, A. Nicita and U. Pagano, eds., pp. 84-102, Routledge, 2007, Minnesota Legal Studies Research Paper No. 07-11, Available at SSRN: https://ssrn.com/abstract=981275

Francesco Parisi (Contact Author)

University of Minnesota - Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States

University of Bologna ( email )

Piazza Scaravilli 1
40126 Bologna, fc 47100
Italy

Nita Ghei

affiliation not provided to SSRN

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