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Ambiguous Contracting: Natural Language and Judicial Interpretation

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  • Shurojit Chatterji
  • Dragan Filipovich

Abstract

We study the relationship between ambiguity (which comes into the picture since contracts have to be written in natural language), and contractual incompleteness. The contracting process is modelled as a signalling game between the parties and the judge, with the contract as the signal. The judge is assumed to be bound by the content of the contract (in as far as it can be ascertained unambiguously). Two kind of examples are presented: The first set of examples shows how ambiguity can lead to incompleteness. Here incompleteness is a way of hedging against adverse judgements on the part of an imperfectly informed judge. The remaining example illustrates a sort of converse intuition: It shows how incompleteness might lead the contracting parties to write ambiguous contracts in order to afford a relatively well-informed judge freedom to enforce the parties'will

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 419.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:419

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Keywords: incomplete contracts; natural language;

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  1. Bernheim, B Douglas & Whinston, Michael D, 1998. "Incomplete Contracts and Strategic Ambiguity," American Economic Review, American Economic Association, vol. 88(4), pages 902-32, September.
  2. Luca Anderlini, Leonardo Felli & Andrew Postlewaite, 2003. "Courts of Law and Unforeseen Contingencies," Working Papers gueconwpa~03-03-26, Georgetown University, Department of Economics.
  3. Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 83-114, January.
  4. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1846, Harvard - Institute of Economic Research.
  5. Baliga, S. & Corchon, L.C. & Sjostrom, T., 1995. "The Theory of Implemetation when the Planner is a PLayer," Cambridge Working Papers in Economics 9512, Faculty of Economics, University of Cambridge.
  6. Luca Anderlini & Leonardo Felli, 1995. "Describability and Agency Problems," Game Theory and Information 9511001, EconWPA, revised 20 Sep 1996.
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Cited by:
  1. Mitchell Berlin & Yaron Leitner, 2005. "Courts and contractual innovation: a preliminary analysis," Working Papers 05-27, Federal Reserve Bank of Philadelphia.
  2. Yaron Leitner, 2005. "Legal uncertainty and contractual innovation," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 26-32.

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