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Unforeseen Contingency and Renegotiation with Asymmetric Information

  • Jihong Lee

    (Department of Economics, Mathematics & Statistics, Birkbeck)

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.

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File URL: http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0717.pdf
File Function: First version, 2007
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Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0717.

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Date of creation: Oct 2007
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Handle: RePEc:bbk:bbkefp:0717
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  1. Geanakoplos & Adam Brandenburger & Eddie Dekel, 1988. "Correlated Equilibrium with Generalized Information Structures," Cowles Foundation Discussion Papers 884R, Cowles Foundation for Research in Economics, Yale University, revised Aug 1989.
  2. Philippe Jehiel & David Ettinger, 2007. "Towards a Theory of Deception," Levine's Bibliography 843644000000000126, UCLA Department of Economics.
  3. Eric Maskin & John Moore, 1998. "Implementation and renegotiation," LSE Research Online Documents on Economics 19350, London School of Economics and Political Science, LSE Library.
  4. Oliver Hart & John Moore, 1998. "Foundations of incomplete contracts," LSE Research Online Documents on Economics 19354, London School of Economics and Political Science, LSE Library.
  5. repec:ebl:ecbull:v:3:y:2005:i:5:p:1-7 is not listed on IDEAS
  6. Malmendier, Ulrike M. & Della Vigna, Stefano, 2003. "Contract Design and Self Control: Theory and Evidence," Research Papers 1801, Stanford University, Graduate School of Business.
  7. 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.
  8. Crawford, Vincent P., 2001. "Lying for Strategic Advantage: Rational and Boundedly Rational Misrepresentation of Intentions," University of California at San Diego, Economics Working Paper Series qt6k65014s, Department of Economics, UC San Diego.
  9. 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.
  10. Erik Eyster & Matt Rabin, 2003. "Cursed Equilibrium," Method and Hist of Econ Thought 0303002, EconWPA.
  11. repec:att:wimass:9714 is not listed on IDEAS
  12. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives For Procrastinators," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 769-816, August.
  13. 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.
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