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Unforeseen Contingencies

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Author Info
Nabil J Al-Najjar
Luca Anderlini
Leonardo Felli

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

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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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. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nabil Al-Najjar & Luca Anderlini & Leonardo Felli, 2003. "Undescribable Contingencies," Discussion Papers 1370, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  2. 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. [Downloadable!]
  3. Guasch, J. Luis & Laffont, Jean-Jacques & Straub, Stephane, 2003. "Renegotiation of concession contracts in Latin America," Policy Research Working Paper Series 3011, The World Bank. [Downloadable!]
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  4. Anderlini, Luca & Felli, Leonardo & Postlewaite, Andrew, 2001. "Courts of Law and Unforeseen Contingencies," CEPR Discussion Papers 2835, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. 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. [Downloadable!]
    Other versions:
  6. Paul Schweinzer, 2001. "Bilateral Uncertainty in a Model of Job-Market Screening with Intermediaries," Game Theory and Information 0108002, EconWPA, revised 08 Jan 2002. [Downloadable!]
  7. Patrick Bolton & Antoine Faure-Grimaud, 2009. "Satisficing Contracts," NBER Working Papers 14654, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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