Investing in Policy Reform

Jim Leitzel and Erik Weisman

Journal of Institutional and Theoretical Economics (JITE), 1999, vol. 155, issue 4, 696-

Abstract: Sunk costs and uncertainty characterize many public policy changes, as well as private investments. The Dixit-Pindyck theory of investment under uncertainty can then be applied to policy reforms, generating a positive option value to delaying a policy reform. The potential to adjust enforcement provides an additional lever for policy makers, as examined here with respect to enforcing a drug prohibition. Control over enforcement can make it optimal to further delay ending a drug ban. A de jure drug legalization is then likely to follow de facto liberalization, as enforcement effort is first reduced.

JEL-codes: D78 K42 (search for similar items in EconPapers)
Date: 1999
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Citations: View citations in EconPapers (4)

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