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Unforeseen Contingency and Renegotiation with Asymmetric Information

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  • Jihong Lee

Abstract

This article considers a buyer–seller contracting model in which the seller possesses private information about all relevant aspects of the state of nature, including how much each action is worth to the buyer. I argue that, given asymmetric information, the buyer may not entirely dismiss an unforeseen contingency claim by the seller. Then, if the buyer lacks the foresight/awareness to ‘expect the unexpected’, the model admits an equilibrium in which a seemingly complete contract is written and then renegotiated along its outcome path to generate inefficiency ex post.

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  • Jihong Lee, 2008. "Unforeseen Contingency and Renegotiation with Asymmetric Information," Economic Journal, Royal Economic Society, vol. 118(528), pages 678-694, April.
    • Handle: RePEc:wly:econjl:v:118:y:2008:i:528:p:678-694
    DOI: 10.1111/j.1468-0297.2008.02137.x
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    References listed on IDEAS

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    Cited by:

    1. Mengel, F. & Tsakas, E. & Vostroknutov, A., 2009. "Awareness in repeated games," Research Memorandum 010, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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