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Ambiguity Aversion and Incompleteness of Contractual Form

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Mukerji, Sujoy

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Abstract

Subjective uncertainty is characterized by ambiguity if the decisionmaker has an imprecise knowledge of the probabilities of payoff-relevant events. In such an instance, subjective beliefs are better represented by a set of probability functions than by a unique probability function. An ambiguity-averse decisionmaker adjusts his choice on the side of caution in response to his imprecise knowledge of the odds. This paper shows that ambiguity aversion can explain the existence of incomplete contracts. The contextual setting is the investment hold-up model which has been the focus of much of the research on incomplete contracts. Copyright 1998 by American Economic Association.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 88 (1998)
Issue (Month): 5 (December)
Pages: 1207-31
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Handle: RePEc:aea:aecrev:v:88:y:1998:i:5:p:1207-31

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  1. Marciano Siniscalchi, 2003. "A Behavioral Characterization of Plausible Priors," Levine's Bibliography 234936000000000064, UCLA Department of Economics. [Downloadable!]
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  2. Fujikawa, Takemi, 2009. "The hot stove effect in repeated-play decision making under ambiguity," MPRA Paper 17647, University Library of Munich, Germany. [Downloadable!]
  3. Nicolai J. Foss, . "The Rhetorical Dimensions of Bounded Rationality: Herbert A. Simon and Organizational Economics," IVS/CBS Working Papers 2002-07, Department of Industrial Economics and Strategy, Copenhagen Business School. [Downloadable!]
  4. Andreas Pape & Subir Bose & Emre Ozdenoren, 2004. "Optimal auctions with ambiguity," Econometric Society 2004 North American Summer Meetings 609, Econometric Society. [Downloadable!]
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  5. Ghirardato, Paolo & Katz, Jonathan N., 2000. "Indecision Theory: Explaining Selective Abstention in Multiple Elections," Working Papers 1106, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  6. Stanislaw Heilpern, 2002. "Using Choquet integral in economics," Statistical Papers, Springer, vol. 43(1), pages 53-73, January. [Downloadable!] (restricted)
  7. Jean-Marc Tallon & Sujoy Mukerji, 2004. "Ambiguity aversion and the absence of wage indexation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00174562_v1, HAL. [Downloadable!]
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  8. Larry G. Epstein & Massimo Marinacci & Seo Kyoungwon, 2006. "Coarse Contingencies," Carlo Alberto Notebooks 4, Collegio Carlo Alberto, revised 2007. [Downloadable!]
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  9. Marie-Louise Vierø, 2006. "Contracting in Vague Environments," Working Papers 1106, Queen's University, Department of Economics. [Downloadable!]
  10. Nicolai J. Foss & Peter G. Klein, 2005. "The Theory of the Firm and Its Critics A Stocktaking and Assessment," DRUID Working Papers 05-03, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies. [Downloadable!]
  11. Itzhak Gilboa & Andrew Postlewaite & David Schmeidler, 2004. "Rationality of Belief Or: Why Savage's axioms are neither necessary nor sufficient for rationality, Second Version," PIER Working Paper Archive 08-043, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 03 Dec 2008. [Downloadable!]
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  12. Claude Henry & Marc Henry, 2002. "Formalization and applications of the precautionary principles," Discussion Papers 0102-22, Columbia University, Department of Economics. [Downloadable!]
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  13. Nicolai J. Foss & Torben Pedersen, . "Transferring Knowledge in MNCs: The Role of Sources of Subsidiary Knowledge and Organizational Context," IVS/CBS Working Papers 00-12, Department of Industrial Economics and Strategy, Copenhagen Business School. [Downloadable!]
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  14. Sujoy Mukerji & Jean-Marc Tallon, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00174539_v1, HAL. [Downloadable!]
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  15. Nicolai J. Foss, . "Strategy, Bargaining, and Economic Organization: Some Thoughts on the Transaction Cost Foundations of Firm Strategy," IVS/CBS Working Papers 00-11, Department of Industrial Economics and Strategy, Copenhagen Business School. [Downloadable!]
  16. Sujoy Mukerji & Jean-Marc Tallon, 2002. "Ellsberg`s 2-Color Experiment, Bid-Ask Behavior and Ambiguity," Economics Series Working Papers 114, University of Oxford, Department of Economics. [Downloadable!]
  17. Constanza M. Fosco Perea M, . "Ambigüedad estratégica en contratos públicos de suministro," ILADES-Georgetown University Working Papers inv127, Ilades-Georgetown University, School of Economics and Bussines. [Downloadable!]
  18. Sujoy Mukerji, 2003. "Ambiguity Aversion and Cost-Plus Procurement Contracts," Economics Series Working Papers 171, University of Oxford, Department of Economics. [Downloadable!]
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