THE THEORY OF FINANCIAL OPTIONS AND THE EFFICIENCY OF THE SOCIAL POLICY: APPLICATION OF THE BLACK-SCHOLES MODEL

THE THEORY OF FINANCIAL OPTIONS AND THE EFFICIENCY OF THE SOCIAL POLICY: APPLICATION OF THE BLACK-SCHOLES MODEL

GANCHO GANCHEV

Abstract

The paper applies the instruments and approaches of the financial options theory to analyze the economic agents’ behavior in the presence of social policy and the economic efficiency of such a policy. The participation of individuals in the social programs is right not an obligation, so it can be viewed as an option. The analogues of such basic terms as strike price, underlying asset, option price and others are suggested. Then the efficiency of the social policy is analyzed on the basis of the BlackScholes model. The efficiency depends on the allocation of resources, taxation and risk, closed economy is assumed. The financial options approach allows for an interesting possibility- we can introduce the agents’ rationality as an endogenous variable rather then exogenous requirement. The approach is applied to the social policy in Bulgaria.

Key words

economic efficiency, social options theory, social policy

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