Lost in Translation: Honest Misunderstandings and Ex Post Disputes

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Lost in Translation: Honest Misunderstandings and Ex Post Disputes

Author Info

Simon Grant () (Department of Economics, Rice University)
Jeff Kline () (Bond University)
John Quiggin () (Department of Economics, University of Queensland)

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Abstract

We give a formal treatment of optimal risk sharing contracts in the face of ambiguity. The central idea is that boundedly rational individuals do not have access to a language sufficiently rich to describe all possible states of nature. The ambiguity in a contract arises from contractual clauses that are interpreted by the parties in different ways. The cost of ambiguity is represented in terms of dispute costs. Taking the potential for dispute into account, we find that risk averse agents may forgo potential gains from risk sharing and choose incomplete contracts instead.

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Publisher Info
Paper provided by Risk and Sustainable Management Group, University of Queensland in its series Risk & Uncertainty Working Papers with number WP3R06.

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Date of creation: Aug 2006
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Handle: RePEc:rsm:riskun:r06_3

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Find related papers by JEL classification:
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-08-26 (All new papers)

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Other versions:
- Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," NBER Working Papers 6726, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1846, Harvard - Institute of Economic Research.
Chew Soo Hong & Jacob S. Sagi, 2006. "Event Exchangeability: Probabilistic Sophistication Without Continuity or Monotonicity," Econometrica, Econometric Society, vol. 74(3), pages 771-786, 05. [Downloadable!] (restricted)
Mukerji, Sujoy & Tallon, Jean-Marc, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," Review of Economic Studies, Blackwell Publishing, vol. 68(4), pages 883-904, October.
Other versions:
- Sujoy Mukerji & Jean-Marc Tallon, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," Post-Print halshs-00174539_v1, HAL. [Downloadable!]
- Sujoy Mukerji & Jean-Marc Tallon, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," UniversitÃ© Paris1 PanthÃ©on-Sorbonne, Post-Print halshs-00174539_v1, HAL. [Downloadable!]
- Mukerji, S. & Tallon, J.-M., 1999. "Ambiguity Aversion and Incompleteness of Financial Markets," Papers 1999-28, Paris I - Economie Mathematique et Applications.
- Sujoy Mukerji & Jean-Marc Tallon, 2000. "Ambiguity Aversion and Incompleteness of Financial Markets," Economics Series Working Papers 046, University of Oxford, Department of Economics. [Downloadable!]
Gilboa, Itzhak & Schmeidler, David, 1995. "Case-Based Decision Theory," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 605-39, August. [Downloadable!] (restricted)
Other versions:
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Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 83-114, January. [Downloadable!] (restricted)
Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-31, December. [Downloadable!] (restricted)
Other versions:
- Mukerji, S., 1996. "Ambiguity Aversion and Incompleteness of Contractual Form," Discussion Paper Series In Economics And Econometrics 9616, Economics Division, School of Social Sciences, University of Southampton.

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