The Value of Waiting in Lawmaking

Abstract

Political actors and legislative bodies often invoke net present value calculations to support proposed legislative change. This paper explores the idea that adopting a law is like investing in a productive asset to identify possible misleading applications of net present value calculations. Investment involves incurring a present cost in the expectation of future benefits. Legal systems can be regarded as making investment decisions when incurring present lawmaking costs that will generate benefits over time. Lawmaking investments share, in varying degrees, three important attributes with other investment decisions. First, lawmaking costs cannot be recovered if the enacted rules prove to be ineffective or undesirable at a later time. That is, lawmaking investments are partially or completely irreversible. Second, there is often uncertainty over the future benefits of the legislation. Chosen rules may prove ineffective or changes in the social or economic circumstances may render them obsolete over time. Third, like any investment decision, timing is an issue for lawmakers to determine: lawmaking innovation or revision of current rules can be postponed. Often delays in such investment decisions come at a cost, given the forgone benefits of the investment in the immediate future. This paper focuses on the value of waiting in lawmaking, illustrating the interaction among the above factors in identifying the conditions that determine the optimal timing of legal intervention. The basic model is followed by two extensions. In the first extension, we allow for some learning and informational benefit from the immediate implementation of the new law. In a second extension, we allow for political time preference to affect the lawmaking choice.