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Unforeseen Contingency and Renegotiation with Asymmetric Information

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Author Info
Jihong Lee (School of Economics, Mathematics & Statistics, Birkbeck)

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Abstract

This paper 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. We 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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File URL: http://www.ems.bbk.ac.uk/research/wp/PDF/BWPEF0717.pdf
File Format: application/pdf
File Function: First version, 2007
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Publisher Info
Paper provided by Birkbeck, School of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0717.

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Date of creation: Oct 2007
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Handle: RePEc:bbk:bbkefp:0717

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Find related papers by JEL classification:
C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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  1. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Harvard Institute of Economic Research Working Papers 1863, Harvard - Institute of Economic Research.
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  2. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives For Procrastinators," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 769-816, August. [Downloadable!] (restricted)
  3. Hart, Oliver & Moore, John, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 115-38, January. [Downloadable!] (restricted)
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  4. Jihong Lee, 2005. "Incomplete Information, Renegotiation, and Breach of Contract," Economics Bulletin, Economics Bulletin, vol. 3(5), pages 1-7. [Downloadable!]
  5. Erik Eyster & Matthew Rabin, 2005. "Cursed Equilibrium," Econometrica, Econometric Society, vol. 73(5), pages 1623-1672, 09. [Downloadable!] (restricted)
  6. Barton L. Lipman, 1995. "Information Processing and Bounded Rationality: A Survey," Canadian Journal of Economics, Canadian Economics Association, vol. 28(1), pages 42-67, February. [Downloadable!] (restricted)
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  7. Yeon-Koo Che & Donald B. Hausch, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March. [Downloadable!] (restricted)
  8. Philippe Jehiel & David Ettinger, 2007. "Towards a Theory of Deception," Levine's Bibliography 843644000000000126, UCLA Department of Economics. [Downloadable!]
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  9. Vincent P. Crawford, 2003. "Lying for Strategic Advantage: Rational and Boundedly Rational Misrepresentation of Intentions," American Economic Review, American Economic Association, vol. 93(1), pages 133-149, March. [Downloadable!] (restricted)
    Other versions:
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