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A matter of interpretation: Ambiguous contracts and liquidated damages

Author

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  • Grant, Simon
  • Kline, J. Jude
  • Quiggin, John

Abstract

We consider the optimality of liquidated damages contracts in a setting of contractual ambiguity and potential for disputes. We show that when parties are ambiguity averse enough, they will optimally choose liquidated damages contracts and sacrifice risk sharing opportunities.

Suggested Citation

  • Grant, Simon & Kline, J. Jude & Quiggin, John, 2014. "A matter of interpretation: Ambiguous contracts and liquidated damages," Games and Economic Behavior, Elsevier, vol. 85(C), pages 180-187.
  • Handle: RePEc:eee:gamebe:v:85:y:2014:i:c:p:180-187 DOI: 10.1016/j.geb.2014.01.019
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    References listed on IDEAS

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    1. Motty Perry & Daniel R. Vincent, 2002. "The Optimal Timing of Procurement Decisions and Patent Allocations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1035-1052, November.
    2. Grant, Simon & Kline, J. Jude & Quiggin, John, 2012. "Differential awareness, ambiguity, and incomplete contracts: A model of contractual disputes," Journal of Economic Behavior & Organization, Elsevier, pages 494-504.
    3. Steven Shavell, 1980. "Damage Measures for Breach of Contract," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 466-490, Autumn.
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    5. Yeon-Koo Che & Tai-Yeong Chung, 1999. "Contract Damages and Cooperative Investments," RAND Journal of Economics, The RAND Corporation, pages 84-105.
    6. Grochulski, Borys & Kocherlakota, Narayana, 2010. "Nonseparable preferences and optimal social security systems," Journal of Economic Theory, Elsevier, pages 2055-2077.
    7. Tai-Yeong Chung, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 1031-1042.
    8. Sujoy Mukerji & Jean-Marc Tallon, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," Review of Economic Studies, Oxford University Press, pages 883-904.
    9. Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, pages 1207-1231.
    10. Grant, Simon & Kline, J. Jude & Quiggin, John, 2014. "A matter of interpretation: Ambiguous contracts and liquidated damages," Games and Economic Behavior, Elsevier, pages 180-187.
    11. Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, pages 1207-1231.
    12. Faruk Gul & Wolfgang Pesendorfer, 2014. "Expected Uncertain Utility Theory," Econometrica, Econometric Society, vol. 82(1), pages 1-39, January.
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    Cited by:

    1. Grant, Simon & Kline, J. Jude & Quiggin, John, 2014. "A matter of interpretation: Ambiguous contracts and liquidated damages," Games and Economic Behavior, Elsevier, pages 180-187.
    2. Grant, Simon & Kline, J. Jude & Quiggin, John, 2012. "Differential awareness, ambiguity, and incomplete contracts: A model of contractual disputes," Journal of Economic Behavior & Organization, Elsevier, pages 494-504.
    3. Grant, Simon & Kline, J. Jude & Quiggin, John, 2012. "Differential awareness, ambiguity, and incomplete contracts: A model of contractual disputes," Journal of Economic Behavior & Organization, Elsevier, pages 494-504.
    4. Grant, Simon & Kline, Jeff & Quiggin, John, 2011. "Ambiguous contracts: a syntactic approach," Risk and Sustainable Management Group Working Papers 153052, University of Queensland, School of Economics.
    5. repec:kap:jrisku:v:54:y:2017:i:3:d:10.1007_s11166-017-9262-2 is not listed on IDEAS

    More about this item

    Keywords

    Ambiguity; Bounded rationality; Expected uncertain utility; Incomplete contracts; Liquidated damages;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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