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Unforeseen Contingency and Renegotiation with Asymmetric Information

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  • Jihong Lee

    (Department of Economics, Mathematics & Statistics, Birkbeck)

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.bbk.ac.uk/ems/research/wp/PDF/BWPEF0717.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by Birkbeck, Department 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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  1. Erik Eyster & Matt Rabin, 2003. "Cursed Equilibrium," Method and Hist of Econ Thought 0303002, EconWPA.
  2. Malmendier, Ulrike M. & Della Vigna, Stefano, 2003. "Contract Design and Self Control: Theory and Evidence," Research Papers 1801, Stanford University, Graduate School of Business.
  3. 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.
  4. David Ettinger & Philippe Jehiel, 2006. "Towards a Theory of Deception," Levine's Bibliography 122247000000000775, UCLA Department of Economics.
  5. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Harvard Institute of Economic Research Working Papers 1863, Harvard - Institute of Economic Research.
  6. Brandenburger, Adam & Dekel, Eddie & Geanakoplos, John, 1992. "Correlated equilibrium with generalized information structures," Games and Economic Behavior, Elsevier, vol. 4(2), pages 182-201, April.
  7. Hart, Oliver & Moore, John, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 115-38, January.
  8. 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.
  9. repec:att:wimass:9714 is not listed on IDEAS
  10. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
  11. Ted O'Donoghue & Matthew Rabin, 1997. "Incentives for Procrastinators," Discussion Papers 1181, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. repec:ebl:ecbull:v:3:y:2005:i:5:p:1-7 is not listed on IDEAS
  13. John Geanakoplos, 1989. "Game Theory Without Partitions, and Applications to Speculation and Consensus," Cowles Foundation Discussion Papers 914, Cowles Foundation for Research in Economics, Yale University.
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Cited by:
  1. Mengel, Friederike & Tsakas, Elias & Vostroknutov Alexander, 2009. "Awareness in Repeated Games," Research Memorandum 010, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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