Hostname: page-component-848d4c4894-4hhp2 Total loading time: 0 Render date: 2024-05-10T01:31:47.892Z Has data issue: false hasContentIssue false
  • English
  • Français

Real Options Theory for Law Makers*

Published online by Cambridge University Press:  17 August 2016

Bruno Deffains  and
Marie Obidzinski
Marie Obidzinski
Affiliation:
Université de Besançon, CRESE, 30 avenue de l'Observatoire 25009 BESANCON CEDEX. Email: marie.obidzinski @ univ-fcomte.fr.
Get access

Summary

The formulation of legal rules is a challenging issue for lawmakers. 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 lawmakers to obtain more information. Therefore, the lower the degree of precision of the law, the shorter the delay.

Résumé

Résumé

La formulation des règles juridiques est un véritable défi pour les producteurs de droit. Des arbitrages sont inévitables entre des règles spécifiques et des règles générales. Les premières apportent de la précision dans les signaux envoyés aux agents, les secondes ont un champ d'action plus large. En utilisant la théorie des options réelles, nous montrons que le degré de précision d'une règle peut être analysé comme un degré de flexibilité qui accroît la valeur de cette règle. Ainsi, nous dérivons un principe normatif pour les producteurs de droit confrontés aux choix entre règles et standards et devant décider de la date d'application de d'une nouvelle règle. Nous montrons en particulier que plus le degré de précision de la règle est faible, plus le délai optimal diminue.

Keywords

Flexibilitéobsolescenceproduction de droitrèglesstandardsdegree of precisionexibilityobsolescencerulemaking

JEL classification

K40: General G12: Asset Pricing • Trading Volume • Bond Interest Rates K00: General C61: Optimization Techniques • Programming Models • Dynamic Analysis
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 75 , Issue 1 , March 2009 , pp. 93 - 117
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2009 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

We are indebted to Emanuela Carbonara, Claude Fluet, Thierry Burger-Helmchen, Giuseppe Dari Mattiacci, Eric Langlais, Paul Mahoney, Jenny Monheim, Francesco Parisi, Stéphane Saussier, Tanguy van Ypersele, Richard Zerbe for useful comments. We would like also to thank the participants in the 2004 conference of the European Association for Evolutionary Political Economy, the 2004 Deutsch-Französiche Gespräche in der ökonomischen Theorie des Rechts at Humbolt- Universität zu Berlin and the 2005 con-ference of European Association for Law and Economics Annual Meeting. All errors remain our own.

References

[1] Ayres, I. (2005). Optional Law: The Structure of Legal Entitlements, Chicago, IL: University of Chicago Press.Google Scholar
[2] Bar-Gill, O. (2005). “Pricing Legal Options: A Behavioral Perspective”, Review of Law and Economics, pp. 203–240.Google Scholar
[3] Baker, G., Gibbons, R. and Murphy, K.J. (1999). “Informal Authority in Organizations”, 15 Journal of Law, Economics and Organization, pp. 56–73.Google Scholar
[4] Black, F. and Scholes, M. (1973). “The Pricing of Options and Corporate Liabilities”, 81 Journal of Political Economy, pp. 637–59.Google Scholar
[5] Cooter, R. and Rubinfeld, D.L. (1989). Economic Analysis of Legal Disputes and Their Resolution”, 27 Journal of Economic Literature, pp. 1067–1097.Google Scholar
[6] Diver, C.S. (1983). “The Optimal Precision of Administrative Rules”, Yale Law Journal, pp 65–109.Google Scholar
[7] Dixit, A.K., and Pindyck, R.S. (1994). Investment Under Uncertainty, Princeton, NJ: Princeton University Press.Google Scholar
[8] Drezner, Z. (1978). “Computation of the Bivariate Normal Integral”, Mathematics of Computation, pp. 277–79.Google Scholar
[9] Ehrlich, I. and Posner, R.A. (1974). “An Economic Analysis of Legal Rulemaking”, The Journal of Legal Studies, pp. 275–86.Google Scholar
[10] Fon, V. and Parisi, F. (2004). “Codifications and the Optimal Specificity of Legal Rules” George Mason University Research Paper 04–32.Google Scholar
[11] Goffin, R. (1995). “Options Réelles sur Maximum ou Minimum”, Banques et Marchés, pp. 17–26.Google Scholar
[12] Goffin, R. (2004). Principes de Finance Moderne, 4e édition, Paris: Economica.Google Scholar
[13] Grundfest, J.A. and Huang, P.H. (2004). “The Unexpected Value of Litigation”, Stanford Law Review, pp. 1267–336.Google Scholar
[14] Hart, H.L.A. (1994). The Concept of Law, 2e Edition, New York: Oxford University Press.Google Scholar
[15] Hull, J. (2004). Options, Futures and Other Derivatives, 5e Edition, Upper Saddle River, NJ: Prentice Hall, Pearson Education.Google Scholar
[16] Johnson, H. (1987). “Options on the Maximum or Minimum of Several Assets”, Journal of Financial and Quantitative Analysis, pp. 277–283.Google Scholar
[17] Johnston, S.J. (1991). “Uncertainty, Chaos and the Tort Process”, Cornell Law Review, pp. 341–400.Google Scholar
[18] Johnston, S.J. (1995). “Bargaining Under Rules Versus Standard”, Journal Law, Economics and Organization, pp. 256–281.Google Scholar
[19] Jones, R.A. and Ostroy, J.M. (1984). “Flexibility and Uncertainty”, The Review of Economic Studies, pp. 13–32.Google Scholar
[20] Kaplow, L. (1992). “Rules versus Standards: an Economic Analysis”, Duke Law Journal, pp 557–629.Google Scholar
[21] Kaplow, L. (1995). “A Model of Optimal Complexity of Law”, Journal of Law, Economics, and Organization, pp. 150–63.Google Scholar
[22] Kaplow, L. (1999). “General Characteristics of Rules,” in Encyclopedia of Law and Economics, ed. By Bouckaert, B. and DeGeest, G., Cheltenham, Edward Elgar.Google Scholar
[23] Landes, W.M. and Posner, R.A. (1975). “The Indépendant Judiciary in an Interest-Group Perspective”, Journal of Law and Economics, pp. 875–901.Google Scholar
[24] Landes, W.M. and Posner, R.A. (1976). “Legal Precedent: A Theoretical and Empirical Analysis”, Journal of Law and Economics, pp. 249–307.Google Scholar
[25] LoPucki, L.M. (1996). “The Death of Liability”, Yale Law Journal, pp. 1–92.Google Scholar
[26] Mahoney, P.G. and Sanchirico, C.W. (2005). “General and Specific Legal Rules,” Journal of Institutional and Theoretical Economics, pp. 329–361.Google Scholar
[27] Malik, A.S. (1990). “Avoidance, Screening and Optimum Enforcement,” RAND Journal of Economics, pp. 341–353.Google Scholar
[28] McDonald, R. and Siegel, D. (1986). “The Value of Waiting to Invest”, Quarterly Journal of Economics, pp. 707–28.Google Scholar
[29] Merton, R.C. (1973). “Theory of Rational Option Pricing”, Bell Journal of Economics and Management Science, pp. 141–84.Google Scholar
[30] Merton, R.C. (1976). “Option Pricing When Underlying Stock Returns Are Discontinuous”, Journal of Financial Economics, pp. 125–44.Google Scholar
[31] Montesquieu, Charles de Secondât (1748). De l’Esprit des Lois, Paris: GF Flammarion.Google Scholar
[32] Parisi, F., Fon, V. and Ghei, N. (2004). “The Value of Waiting in Law-making”, European Journal of Law and Economics, pp. 131–48.Google Scholar
[33] Pistor, K. and Xu, C. (2003). “Law Enforcement Under Incomplete Law: Theory and Evidence From the Financial Market Regulation”, Columbia Law and Economics Working Paper No. 222, http://ssrn.com/abstract=396141. Google Scholar
[34] Pistor, K. and Xu, C. (2002a). “Incomplete Law – A Conceptual and Analytical Framework and its Application to the Evolution of Financial Market Regulation”, Columbia Law and Economics Working Paper No. 204, http://ssrn.com/abstract=310588.Google Scholar
[35] Pistor, K. and Xu, C. (2002b). “Fiduciary Duty in Transitional Civil Law Jurisdictions Lessons from the Incomplete Law Theory”, ECGI Law Working Paper No. 01/2002, http://ssrn.com/abstract=343480.Google Scholar
[36] Posner, R.A. (1999). The Problematics of Moral and Legal Theory, Cambridge, MA: Harvard University Press.Google Scholar
[37] Posner, R.A. (2003). Economic Analysis of Law, 6e Edition, New York: Aspen.Google Scholar
[38] Piatecki, C. (2004) “Introduction aux Mathématiques de l’Economie Stochastique en Temps Continu”, Document de travail du Laboratoire d’Economie d’Orléans.Google Scholar
[39] Spier, K.E. (1994). “Settlement Bargaining and the Design of Damage Awards”, Journal of Law, Economics and Organization, pp. 84–95.Google Scholar
[40] Stigler, G.J. (1971). “The Theory of Economic Regulation”, Bell Journal of Economics and Managment Science, pp. 3–21 Google Scholar
[41] Stulz, R.M. (1982). “Options on the Minimum and the Maximum of Two Risky Assets”, Journal of Financial Economics, pp. 161–85.Google Scholar