A Matter of Interpretation: Bargaining over Ambiguous Contracts
AbstractWe present a formal treatment of contracting in the face of ambiguity. The central idea is that boundedly rational individuals will not always interpret the same situation in the same way. More specifically, even with well defined contracts, the precise actions to be taken by each party to the contract might be disputable. Taking this potential for dispute into account, we analyze the effects of ambiguity on contracting. We find that risk averse agents will engage in ambiguous contracts for risk sharing reasons. We provide an application where ambiguity motivates the use of a liquidated damages contract.
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Bibliographic InfoPaper provided by Risk and Sustainable Management Group, University of Queensland in its series Risk & Uncertainty Working Papers with number WPR09_3.
Date of creation: Nov 2009
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More information through EDIRC
ambiguity; bounded rationality; expected uncertain utility; incomplete contracts; liquidated damages.;
Other versions of this item:
- Grant, Simon & Kline, Jeff & Quiggin, John, 2009. "A Matter of Interpretation: Bargaining over Ambiguous Contracts," Risk and Sustainable Management Group Working Papers 151190, University of Queensland, School of Economics.
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-17 (All new papers)
- NEP-BEC-2010-04-17 (Business Economics)
- NEP-CBE-2010-04-17 (Cognitive & Behavioural Economics)
- NEP-UPT-2010-04-17 (Utility Models & Prospect Theory)
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