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Incorporating unawareness into contract theory

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  • Filiz-Ozbay, Emel

Abstract

Asymmetric awareness of the contracting parties regarding the uncertainty surrounding them is proposed as a reason for incompleteness in contractual forms. An insurance problem is studied between a risk neutral insurer, who has superior awareness regarding the nature of the uncertainty, and a risk averse insuree, who cannot foresee all the relevant contingencies. The insurer can mention in a contract some contingencies that the insuree was originally unaware of. It is shown that there are equilibria where the insurer strategically offers incomplete contracts. Competition among insurers who are symmetrically aware of the uncertainty promotes awareness of the insuree.

Suggested Citation

  • Filiz-Ozbay, Emel, 2012. "Incorporating unawareness into contract theory," Games and Economic Behavior, Elsevier, vol. 76(1), pages 181-194.
  • Handle: RePEc:eee:gamebe:v:76:y:2012:i:1:p:181-194
    DOI: 10.1016/j.geb.2012.05.009
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Heifetz, Aviad & Meier, Martin & Schipper, Burkhard C., 2013. "Dynamic unawareness and rationalizable behavior," Games and Economic Behavior, Elsevier, vol. 81(C), pages 50-68.
    2. Burkhard Schipper, 2017. "Kuhn's Theorem for Extensive Games with Unawareness," Working Papers 176, University of California, Davis, Department of Economics.
    3. Haisken-DeNew, John & Hasan, Syed & Jha, Nikhil & Sinning, Mathias, 2018. "Unawareness and selective disclosure: The effect of school quality information on property prices," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 449-464.
    4. Li, Sanxi & Peitz, Martin & Zhao, Xiaojian, 2016. "Information disclosure and consumer awareness," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 209-230.
    5. Antoine Dubus, 2017. "Asymmetric Awareness and Heterogeneous Agents," Working Papers hal-01521487, HAL.
    6. Auster, Sarah, 2013. "Asymmetric awareness and moral hazard," Games and Economic Behavior, Elsevier, vol. 82(C), pages 503-521.
    7. repec:eee:gamebe:v:106:y:2017:i:c:p:134-152 is not listed on IDEAS
    8. Sarah Auster, 2012. "Asymmetric Awareness and Moral Hazard," Economics Working Papers ECO2012/23, European University Institute.
    9. Burkhard Schipper & Hee Yeul Woo, 2014. "Political Awareness, Microtargeting of Voters, and Negative Electoral Campaigning," Working Papers 148, University of California, Davis, Department of Economics.
    10. Ying-Ju Chen & Xiaojian Zhao, 2013. "Solution Concepts of Principal-Agent Models with Unawareness of Actions," Games, MDPI, Open Access Journal, vol. 4(3), pages 1-24, August.
    11. Nicola Pavoni & Sarah Auster, 2016. "Optimal Delegation, Unawareness, and Financial Intermediation," 2016 Meeting Papers 1106, Society for Economic Dynamics.
    12. Schumacher, Heiner & Thysen, Heidi, 2017. "Equilibrium Contracts and Boundedly Rational Expectations," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168085, Verein für Socialpolitik / German Economic Association.
    13. Ernst-Ludwig Thadden & Xiaojian Zhao, 2014. "Multi-task agency with unawareness," Theory and Decision, Springer, vol. 77(2), pages 197-222, August.
    14. Sarah Auster & Nicola Pavoni, 2018. "Optimal Delegation and Limited Awareness, with an Application to Financial Intermediation," BAFFI CAREFIN Working Papers 1869, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

    More about this item

    Keywords

    Asymmetric awareness; Insurance;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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