Working Paper BETA #2006-04

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Title : Real Options Theory for Law Makers

Author(s) : Marie Obidzinski, Bruno Deffains

Abstract : In rapidly changing areas of law, the writing of rules is a challenging issue for lawmakers. Obsolescence impede law to capture the objective of an underlying policy. The legislator, the judge and the regulator are considered as producers of law who have to decide whether or not to invest in a particular type of law. In order to get more information on the context, lawmakers may also choose to wait before investing in law. Using the real options framework, we show that the degree of precision should be considered as a degree of flexibility of legal rules and we describe how it affects the value of the investment. We then analyze the trade-off between waiting and reducing the degree of precision and we show that the degree of precision of legal rules positively affects the value of waiting in lawmaking.

Key-words : Obsolescence, Rulemaking, Degree of Precision, Real Options

JEL Classification : C61, G12, K00, K40