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Unforeseen Contingencies

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Author Info

  • Nabil J Al-Najjar
  • Luca Anderlini
  • Leonardo Felli

Abstract

We develop a model of unforeseen contingencies. These are contingencies that are understood by economic agents - their consequences and probabilities are known - but are such that every description of such events necessarily leaves out relevant features that have a non-negligible impact on the parties' expected utilities. Using a simple co-insurance problem as a backdrop, we introduce a model where states are described in terms of objective features, and the description of an event specifies a finite number of such features. In this setting, unforeseen contingencies are present in the co-insurance problem when the first-best risk-sharing contract varies with the states of nature in a complex way that makes it highly sensitive to the component features of the states. In this environment, although agents can compute expected pay-offs, they are unable to include in any ex-ante agreement a description of the relevant contingencies that captures (even approximately) the relevant complexity of the risky environment.

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File URL: http://sticerd.lse.ac.uk/dps/te/te431.pdf
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Bibliographic Info

Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Theoretical Economics Paper Series with number 431.

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Date of creation: Feb 2002
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Handle: RePEc:cep:stitep:431

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

Related research

Keywords: Unforeseen contingencies; incomplete contracts; finite invariance; fine variability.;

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References

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  1. Anderlini, Luca & Felli, Leonardo, 1998. "Describability and agency problems," European Economic Review, Elsevier, vol. 42(1), pages 35-59, January.
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Citations

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Cited by:
  1. J. Luis Guasch & Jean-Jacques Laffont & Stephane Straub, 2004. "Renegotiation of Concession Contracts in Latin America," ESE Discussion Papers 103, Edinburgh School of Economics, University of Edinburgh.
  2. Cesare Dosi & Michele Moretto, 2012. "Procurement with Unenforceable Contract Time and the Law of Liquidated Damages," Working Papers 2012.45, Fondazione Eni Enrico Mattei.
  3. Nabil I. Al-Najjar & Luca Anderlini & Leonardo Felli, 2003. "Undescribable Events," CESifo Working Paper Series 1092, CESifo Group Munich.
  4. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2003. "Courts of law and unforeseen contingencies," LSE Research Online Documents on Economics 3576, London School of Economics and Political Science, LSE Library.
  5. Paul Schweinzer, 2001. "Bilateral Uncertainty in a Model of Job-Market Screening with Intermediaries," Game Theory and Information 0108002, EconWPA, revised 08 Jan 2002.
  6. Nabil Al-Najjar & Luca Anderlini & Leonardo Felli, 2003. "Undescribable Contingencies," Discussion Papers 1370, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Pierpaolo Battigalli & Giovanni Maggi, 2002. "Rigidity, Discretion, and the Costs of Writing Contracts," American Economic Review, American Economic Association, vol. 92(4), pages 798-817, September.
  8. Pierpaolo Battigalli & Giovanni Maggi, 2004. "Costly Contracting in a Long-Term Relationship," Working Papers 04-33, New York University, Leonard N. Stern School of Business, Department of Economics.
  9. Patrick Bolton & Antoine Faure-Grimaud, 2009. "Satisficing Contracts," NBER Working Papers 14654, National Bureau of Economic Research, Inc.
  10. Guasch, J. Luis & Laffont, Jean-Jacques & Straub, Stéphane, 2008. "Renegotiation of concession contracts in Latin America: Evidence from the water and transport sectors," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 421-442, March.
  11. Jorge Montesinos & Eduardo Saavedra, 2012. "Algunos Alcances en torno a la Institucionalidad y Renegociación de Concesiones en la Infraestructura de Transporte de Uso Público en Perú," ILADES-Georgetown University Working Papers inv277, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.

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