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A Matter of Interpretation: Ambiguous Contracts and Liquidated Damages

Listed author(s):
  • Grant, Simon
  • Kline, Jeff
  • Quiggin, John

We focus on syntactic aspects of differential awareness that give rise to contractual disputes. Boundedly rational parties use a common language, but do not share a common understanding of the world, leading to ambiguity in both syntactic and semantic forms. In contractual relationships, ambiguity leads to disagreement and disputes. We show that the agents may prefer simpler less ambiguous contracts when facing potential disputes. In particular, parties may prefer liquidated damages provisions to contractual terms that specify a more complex risk allocation.

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File URL: http://purl.umn.edu/151204
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Paper provided by University of Queensland, School of Economics in its series Risk and Sustainable Management Group Working Papers with number 151204.

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Date of creation: 10 May 2012
Handle: RePEc:ags:uqsers:151204
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  1. Yeon-Koo Che & Tai-Yeong Chung, 1999. "Contract Damages and Cooperative Investments," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 84-105, Spring.
  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, vol. 82(2), 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.
  4. repec:pit:wpaper:378 is not listed on IDEAS
  5. Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-1231, December.
  6. 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.
  7. Kim-Sau Chung & Oliver Board, 2007. "Object-Based Unawareness," Working Papers 2007-2, University of Minnesota, Department of Economics, revised 24 Aug 2007.
  8. Tai-Yeong Chung, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 1031-1042.
  9. Sujoy Mukerji & Jean-Marc Tallon, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," Review of Economic Studies, Oxford University Press, vol. 68(4), pages 883-904.
  10. Faruk Gul & Wolfgang Pesendorfer, 2014. "Expected Uncertain Utility Theory," Econometrica, Econometric Society, vol. 82(1), pages 1-39, January.
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