Harvard Law Review
Legal scholars are beginning to explore how the options template, borrowed from finance, can be applied to legal problems outside the realm of finance. This Article uses the options framework to add a new, intermediate entitlement form to the property rule/liability rule schema pioneered by Guido Calabresi and Douglas Melamed. Building on a fascinating but underused literature on self-assessed valuation mechanisms, I propose an entitlement form that would require entitlement holders to create options for others (or for their future selves). These "entitlements subject to self-made options," or "ESSMOs," are capable of powerfully and elegantly addressing one of the most intractable problems in property theory - unknown subjective valuations. By requiring a party to package her subjective valuation in the form of an option - that is, a "revealing option" - the ESSMO dodges the primary problems associated with property rules and liability rules while harnessing advantages of each. The real payoff of this approach comes in dynamic, multiparty "commons" settings. Extending my earlier work, I show how the ESSMO can transform environmental controls, land conservation, and aesthetic controls in private neighborhoods. I also illustrate how revealing options can address intertemporal collective action problems in institutions, as well as time-inconsistent preferences in individuals (such as the smoker who wishes to quit).
Lee Anne Fennell, "Revealing Options," 118 Harvard Law Review 1399 (2005).