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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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    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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