Chapter

The Bill of Options?

Ian Ayres

in Optional Law

Published by University of Chicago Press

Published in print June 2005 | ISBN: 9780226033464
Published online February 2013 | e-ISBN: 9780226033488 | DOI: http://dx.doi.org/10.7208/chicago/9780226033488.003.0001
The Bill of Options?

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Advances in option theory count as some of the most important and pragmatic developments in economic thought in the last twenty-eight years. One of the most important contributions of option theory to our understanding of asset value is that options become more valuable as the volatility in the underlying asset increases. This book uses option theory to illuminate the different ways that policymakers can protect legal entitlements. There are six take-home lessons. First, where there are calls, there must be puts. Second, courts can decouple distributive and allocative concerns. Third, the option perspective illuminates how liability rules allow imperfectly informed courts to delegate the allocative decision to disputants with private information. Fourth, while traditional liability rules delegate the allocation choice to a “single chooser” (either the plaintiff or the defendant), it is also possible for courts to create an option that delegates the allocative choice to both parties—by allowing either disputant to veto a particular allocation. Fifth, liability rules can mimic auctions. Sixth, liability rules allow bargainers to reveal information credibly.

Keywords: option theory; liability rules; options; legal entitlements; calls; puts; asset value; courts; allocative choice

Chapter.  4236 words. 

Subjects: Econometrics and Mathematical Economics

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