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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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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. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1846, Harvard - Institute of Economic Research.
  2. 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.
  3. 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.
  4. Barton L. Lipman, 1993. "Information Processing and Bounded Rationality: A Survey," Working Papers 872, Queen's University, Department of Economics.
  5. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Harvard Institute of Economic Research Working Papers 1863, Harvard - Institute of Economic Research.
  6. Stefano Della Vigna & Ulrike Malmendier, 2004. "Contract Design and Self-control: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 353-402, May.
  7. 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.
  8. Che, Y.K. & Hausch, D.B., 1997. "Cooperative Investments and the Value of Contracting," Working papers 9714, Wisconsin Madison - Social Systems.
  9. Philippe Jehiel & David Ettinger, 2007. "Towards a Theory of Deception," Levine's Bibliography 843644000000000126, UCLA Department of Economics.
  10. Brandenburger, Adam & Dekel, Eddie & Geanakoplos, John, 1992. "Correlated equilibrium with generalized information structures," Games and Economic Behavior, Elsevier, vol. 4(2), pages 182-201, April.
  11. repec:ebl:ecbull:v:3:y:2005:i:5:p:1-7 is not listed on IDEAS
  12. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives For Procrastinators," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 769-816, August.
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