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Unforeseen Contingency and Renegotiation with Asymmetric Information

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  • Jihong Lee

Abstract

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).

Suggested Citation

  • Jihong Lee, 2008. "Unforeseen Contingency and Renegotiation with Asymmetric Information," Economic Journal, Royal Economic Society, vol. 118(528), pages 678-694, April.
    • Handle: RePEc:ecj:econjl:v:118:y:2008:i:528:p:678-694
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    Cited by:

    1. Mengel, F. & Tsakas, E. & Vostroknutov, A., 2009. "Awareness in repeated games," Research Memorandum 010, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

    More about this item

    JEL classification:

    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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