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Unforeseen Contingency and Renegotiation with Asymmetric Information

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  • Jihong Lee

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

This paper considers a buyer-seller contracting model in which the seller possesses private information about all relevant aspects of the state of nature, including how much each action is worth to the buyer. We argue that, given asymmetric information, the buyer may not entirely dismiss an unforeseen contingency claim by the seller. Then, if the buyer lacks the foresight/awareness to “expect the unexpected”, the model admits an equilibrium in which a seemingly complete contract is written and then renegotiated along its outcome path to generate inefficiency ex post.

Suggested Citation

  • Jihong Lee, 2007. "Unforeseen Contingency and Renegotiation with Asymmetric Information," Birkbeck Working Papers in Economics and Finance 0717, Birkbeck, Department of Economics, Mathematics & Statistics.
  • Handle: RePEc:bbk:bbkefp:0717
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    References listed on IDEAS

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    1. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 39-56.
    2. Oliver Hart & John Moore, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 115-138.
    3. David Ettinger & Philippe Jehiel, 2004. "Towards a Theory of Deception," Levine's Bibliography 122247000000000247, UCLA Department of Economics.
    4. Erik Eyster & Matthew Rabin, 2005. "Cursed Equilibrium," Econometrica, Econometric Society, vol. 73(5), pages 1623-1672, September.
    5. Barton L. Lipman, 1995. "Information Processing and Bounded Rationality: A Survey," Canadian Journal of Economics, Canadian Economics Association, vol. 28(1), pages 42-67, February.
    6. Stefano DellaVigna & Ulrike Malmendier, 2004. "Contract Design and Self-Control: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 119(2), pages 353-402.
    7. Brandenburger, Adam & Dekel, Eddie & Geanakoplos, John, 1992. "Correlated equilibrium with generalized information structures," Games and Economic Behavior, Elsevier, vol. 4(2), pages 182-201, April.
    8. Vincent P. Crawford, 2003. "Lying for Strategic Advantage: Rational and Boundedly Rational Misrepresentation of Intentions," American Economic Review, American Economic Association, vol. 93(1), pages 133-149, March.
    9. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
    10. repec:ebl:ecbull:v:3:y:2005:i:5:p:1-7 is not listed on IDEAS
    11. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives for Procrastinators," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 769-816.
    12. John Geanakoplos, 1989. "Game Theory Without Partitions, and Applications to Speculation and Consensus," Cowles Foundation Discussion Papers 914, Cowles Foundation for Research in Economics, Yale University.
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    Cited by:

    1. Mengel Friederike & Tsakas Elias & Vostroknutov Alexander, 2009. "Awareness in Repeated Games," Research Memorandum 010, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

    More about this item

    JEL classification:

    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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