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Incorporating unawareness into contract theory

  • Filiz-Ozbay, Emel

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0899825612000826
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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 76 (2012)
Issue (Month): 1 ()
Pages: 181-194

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Handle: RePEc:eee:gamebe:v:76:y:2012:i:1:p:181-194
DOI: 10.1016/j.geb.2012.05.009
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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