Skip to main content
SpringerLink
Log in

Criminal Behavior: A Real Option Approach With an Application to Restricting Illegal Insider Trading

  • Published:
European Journal of Law and Economics Aims and scope Submit manuscript

Abstract

Traditionally, criminal behavior is analyzed within an expected utility framework. This paper offers an alternative model to analyze criminal behavior based on real option models. It is shown that all criminal decisions can be analyzed as real options, in a sense that they confer the possibility but not the obligation to commit a crime in the future. The criminal option model is a richer model compared to conventional economic models of crime, because it takes into account four additional variables. As such, the conventional economic analysis of crime is a special case of criminal option models. The criminal option model is then applied to the enforcement of illegal insider trading. Based on the six value-drivers of criminal options, an active management strategy can be developed for the criminal as well as for the legislator.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Amran, M. & Kulatilaka, N. (1999). Real Options. Harvard Business School Press, p. 246.

  • Asquith, P. & Mullins, D. (1986). “Signalling with Dividends, Stock Repurchases and Equity Issues.” Financial Management. 15, 27–44.

    Google Scholar 

  • Bainbridge, S. (2000). “Insider Trading.” In B. Bouckaert en G. De Geest (eds.), Encyclopedia of Law and Economics, Vol.III, The Regulation of Contracts. Edward Elgar, pp. 772–812.

  • Bates, D. (2003). “Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options.” Review of Financial Studies.9,69–107.

    Google Scholar 

  • Becker, G. (1968). “Crime and Punishment: An Economic Approach.” Journal of Political Economy. 76(2), 169–217.

    Google Scholar 

  • Black, F. & Scholes, M. (1973). “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy. 81, 637–659.

    Google Scholar 

  • Boyle, P. (1977). “Options: A Monte Carlo Approach.” Journal of Financial Economics. 4(2), 323–338.

    Google Scholar 

  • Brudney, V. (1979). “Insiders, Outsiders, and Informational Advantages Under the Federal Securities Law.” Harvard Law Review. 93, 322–376.

    Google Scholar 

  • Carlton, D. W. & Fischel, D. R. (1983). “The Regulation of Insider Trading.” Stanford Law Review. 35, 857–895.

    Google Scholar 

  • Carr, P. & Wu, L. (2003). “Time-Changed Lévy Processes and Option Pricing.” Journal of Financial Economics (forthcoming).

  • Cassimon, D. & Engelen, P. J. (2000). “The Valuation of R & D-Intensive Pharma Firms: A Real Option Approach.” In A. Javor, van W. Eimeren & G. Duru (eds.), The 7th International Conference on System Science in Health Care.Proceedings I. International Society on System Science in Health Care (ISSSHC), blz.248–252.

  • Comment, R. & Jarrell, G. A. (1991). “The Relative Signalling Power of Dutch-Auction and Fixed-Price Self-Tender Offers and Open-Market Share Repurchases.” Journal of Finance. 46, 1243–1271.

    Google Scholar 

  • Cooter, R. & Ulen, T. (2000). Law and Economics. Addison-Wesley, Reading, p. 445.

    Google Scholar 

  • Cruyt, M. (1991). “Preventieve acties inzake misbruik van voorwetenschapvanwege beursgenoteerde venootschap-pen.” In E. Wymeersch & G. Schrans (eds.), Financiële herregulering in België. Kluwer (in Dutch).

  • Dixit, A. & Pindyck, R. (1994). Investment Under Uncertainty. New York: Princeton Press, p. 468.

    Google Scholar 

  • Edleson, M. & Reinhardt, F. (1993). “Investment in Pollution Compliance Options: The Case of Georgia Power.” In L. Trigeorgis (ed.), Real Options in Capital Investment.

  • Elton, E. & Gruber, M. (1995). Modern Portfolio Theory and Investment Analysis.Wiley, p. 715.

  • Engelen, P. J. (1997). “Is the Enforcement of Insider Trading Regulation Enforceable?” European Journal of Crime, Criminal Law and Criminal Justice. 5(2), 105–111.

    Google Scholar 

  • Engelen, P. J. (1999). Information Disclosure by Listed Companies. Intersentia Law Publishers, p. 331 (in Dutch).

  • Engelen, P. J. (2002). “Remedies to Informational Asymmetries in Stock Markets.” PhD dissertation, University of Antwerp, p. 342.

  • Engelen, P. J. & Kabir, R. (2001). “Empirical Evidence on the Role of Trading Suspensions in Disseminating New Information to the Capital Market.” CentER for Economic Research, Discussion Papers, 2001-92, 30 p.

  • Fischel, D. (1984). “Insider Trading and Investment Analysts: An Economic Analysis of Dirks v. Securities and Exchange Commission.” Hofstra Law Review. 13, 127–146.

    Google Scholar 

  • Fischer, S. (1978). “Call Option Pricing When the Exercise Price is Uncertain and the Valuation of Index Bonds.” Journal of Finance. 33, 169–176.

    Google Scholar 

  • Gibson, R. (1991). Option Valuation.Analyzing and Pricing Standardized Option Contracts. McGraw-Hill.

  • Givoly, D. & Palmon, D. (1985). “Insider Trading and the Exploitation of Inside Information: Some Empirical Evidence.” Journal of Business. 69–87.

  • Hendricks, D. (1991). “Optimal Policy Responses to an Uncertain Threat: The Case of Global Warming.” Working Paper, Kennedy School of Government, Harvard University.

  • Hull, J. (2000). Options, Futures and Other Derivative Securities. Prentice Hall, p. 698.

  • Ingersoll, J. & Ross, S. (1992). “Waiting to Invest: Investment and Undercertainty.” Journal of Business. 65, 1–29.

    Google Scholar 

  • Jackwerth, J. & Rubinstein, M. (1995). “Recovering Probability Distributions from Contemporaneous Security Prices.” Journal of Finance. 51, 1611–1631.

    Google Scholar 

  • Jaffe, J. (1974). “The Effect of Regulation Changes on Insider Trading.” Bell Journal of Economics and Manage-ment Science. 93–121.

  • Kester, W. (1993). “Turning Growth Options into Real Assets.” In R. Aggarwal (ed.), Capital Budgeting Under Uncertainty. Prentice Hall.

  • Kulatilaka, N. (1993). “The Value of Flexibility: The Case of a Dual-Fuel Industrial Steam Boiler.” Financial Management. 22, 271–279.

    Google Scholar 

  • Kulatilaka, N. & Trigeorgis, L. (1994). “The General Flexibility to Switch: Real Options Revisited.” International Journal of Finance.6, 778–798.

    Google Scholar 

  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A. & Vishny, R. W. (1997). “Legal Determinants of External Finance.” Journal of Finance. 52, 1131–1150.

    Google Scholar 

  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A. & Vishny, R. W. (1998). “Law and Finance.” Journal of Political Economy. 106, 1113–1155.

    Google Scholar 

  • Manne, H. G. (1966). Insider Trading and the Stock Market. New York: Free Press, p. 189.

    Google Scholar 

  • Margrabe, W. (1978). “The Value of an Option to Exchange one Asset for Another.” Journal of Finance. 33, 86–177.

    Google Scholar 

  • McDonald, R. L. (2003). Derivatives Markets. Boston: Addison-Wesley, p. 881.

    Google Scholar 

  • Merton (1973). “The Theory of Rational Option Pricing.” Bell Journal of Economics and Management Science. 4, 141–183.

    Google Scholar 

  • Myers, S. & Majd, S. (1990). “Abandonment Value and Project Life.” Advances in Futures and Options Research. 4, 1–21.

    Google Scholar 

  • Neftci, S. (1996). Mathematics of Financial Derivatives. Academic Press, p. 352.

  • Paddock, J., Siegel, D. & Smith, J. (1988). “Option Valuation of Claims on Physical Assets: The Case of Offshore Petroleum Leases.” Quarterly Journal of Economics. 103, 479–508.

    Google Scholar 

  • Pan, J. (2002). “The Jump-Risk Premia Implicit in Options: Evidence from an Integrated Time-Series Study.” Journal of Financial Economics. 63, 3–50.

    Google Scholar 

  • Pelsser, A. & Vorst, T. (1994). “The Binomial Model and the Greeks.” The Journal of Derivatives. 45–49.

  • Pennings, E. & Lint, O. (1997). “The Option Value of Advanced R & D.” European Journal of Operations Research. 103, 83–94.

    Google Scholar 

  • Quigg, L. (1994). “Optimal Land Development.” In L. Trigeorgis (ed.), Real Options in Capital Investment: New Contributions. New York: Praeger.

    Google Scholar 

  • Ross, S. A. (1977). “The Determination of Financial Structure: The Incentive-Signalling Approach.” Bell Journal of Economics. 23–40.

  • Rubinstein, M. (1976). “The Valuation of Uncertain Income Streams and the Pricing of Options.” Bell Journal of Economics.7,407–425.

    Google Scholar 

  • Scott, K. (1998). “Insider Trading.” In P. Newman (ed.), The New Palgrave Dictionary of Economics and the Law. London: Macmillan, pp. 410–419.

    Google Scholar 

  • Sick, G. (1995). “Real Options.” In R. Jarrow et al. (eds.), Handbooks in OR & MS.vol. 9, Elsevier, pp. 631–691.

  • Trigeorgis, L. (1991). “A Log-Transformed Binomial Numerical Analysis Method for Valuing Complex Multi-Option Investments.” Journal of Financial and Quantitative Analysis. 26(3), 309–326.

    Google Scholar 

  • Trigeorgis, L. (1996). Real Options. MIT Press, p. 427.

  • Trigeorgis, L. (2000). “Real Options and Financial Decision-Making.” Contemporary Finance Digest. 5–42.

  • Trigeorgis, L. & Mason, S. (1987). “Valuing Managerial Flexibility.” Midland Corporate Finance Journal.5, 14–21.

    Google Scholar 

  • Vermaelen, T. (1981). “Common Stock Repurchases and Market Signalling.” Journal of Financial Economics. 9, 139–183.

    Google Scholar 

  • Wimott, P. (1998). Derivatives.The Theory and Practice of Financial Engineering.Wiley, p. 739.

  • Wolfgang, P. & Baschnagel, J. (1999). Stochastic Processes.From Physics to Finance. Springer, p. 231.

Download references

Author information

Authors and Affiliations

  1. Utrecht School of Economics, Utrecht University, Netherlands, Vredenburg 138, 3511, BG Utrecht, Netherlands

    Peter-Jan Engelen

Authors
  1. Peter-Jan Engelen
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Engelen, PJ. Criminal Behavior: A Real Option Approach With an Application to Restricting Illegal Insider Trading. European Journal of Law and Economics 17, 329–352 (2004). https://doi.org/10.1023/B:EJLE.0000028640.24757.5d

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/B:EJLE.0000028640.24757.5d

Search

Navigation