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Unforeseen Contingency and Renegotiation with Asymmetric Information

  • Jihong Lee

This article considers a buyer-seller contracting model in which the seller possesses private information about all relevant aspects of the state of nature, including how much each action is worth to the buyer. I argue that, given asymmetric information, the buyer may not entirely dismiss an unforeseen contingency claim by the seller. Then, if the buyer lacks the foresight/awareness to 'expect the unexpected', the model admits an equilibrium in which a seemingly complete contract is written and then renegotiated along its outcome path to generate inefficiency "ex post". Copyright � 2008 The Author(s).

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0297.2008.02137.x
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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 118 (2008)
Issue (Month): 528 (04)
Pages: 678-694

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Handle: RePEc:ecj:econjl:v:118:y:2008:i:528:p:678-694
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  1. Geanakoplos & Adam Brandenburger & Eddie Dekel, 1988. "Correlated Equilibrium with Generalized Information Structures," Cowles Foundation Discussion Papers 884R, Cowles Foundation for Research in Economics, Yale University, revised Aug 1989.
  2. Oliver Hart & John Moore, 1998. "Foundations of incomplete contracts," LSE Research Online Documents on Economics 19354, London School of Economics and Political Science, LSE Library.
  3. David Ettinger & Philippe Jehiel, 2004. "Towards a Theory of Deception," Levine's Bibliography 122247000000000247, UCLA Department of Economics.
  4. Malmendier, Ulrike M. & Della Vigna, Stefano, 2003. "Contract Design and Self Control: Theory and Evidence," Research Papers 1801, Stanford University, Graduate School of Business.
  5. Eyster, Erik & Rabin, Matthew, 2002. "Cursed Equilibrium," Department of Economics, Working Paper Series qt7p2911dn, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  6. Ted O'Donoghue & Matthew Rabin, 1997. "Incentives for Procrastinators," Discussion Papers 1181, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
  8. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Harvard Institute of Economic Research Working Papers 1863, Harvard - Institute of Economic Research.
  9. Vincent P. Crawford, 2003. "Lying for Strategic Advantage: Rational and Boundedly Rational Misrepresentation of Intentions," American Economic Review, American Economic Association, vol. 93(1), pages 133-149, March.
  10. John Geanakoplos, 1989. "Game Theory Without Partitions, and Applications to Speculation and Consensus," Cowles Foundation Discussion Papers 914, Cowles Foundation for Research in Economics, Yale University.
  11. Barton L. Lipman, 1995. "Information Processing and Bounded Rationality: A Survey," Canadian Journal of Economics, Canadian Economics Association, vol. 28(1), pages 42-67, February.
  12. repec:ebl:ecbull:v:3:y:2005:i:5:p:1-7 is not listed on IDEAS
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