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Undescribable Events

Author

Listed:
  • Nabil I. Al-Najjar
  • Luca Anderlini
  • Leonardo Felli

Abstract

We develop a model of undescribable events. Examples of events that are well understood by economic agents but are prohibitively difficult to describe in advance abound in real-life. This notion has also pervaded a substantial amount of economic literature. We put forth a model of such events using a simple co-insurance problem as backdrop. Undescribable events in our model are understood by economic agents - their consequences and probabilities are known - but are such that every finite description of such events necessarily leaves out relevant features that have a non-negligible impact on the parties’ expected utilities. We also show that two key ingredients of our model - probabilities that are finitely additive but fail countable additivity, and a state space that is small (discrete in our model) in a measure-theoretic sense -are necessary ingredients of any model of undescribable events that delivers our results.

Suggested Citation

  • Nabil I. Al-Najjar & Luca Anderlini & Leonardo Felli, 2003. "Undescribable Events," CESifo Working Paper Series 1092, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1092
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    References listed on IDEAS

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    1. Raghuram G. Rajan & Luigi Zingales, 1998. "Power in a Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 387-432.
    2. Andrew Postlewaite, 2007. "Courts of Law and Unforeseen Contingencies," Journal of Law, Economics, and Organization, Oxford University Press, vol. 23(3), pages 662-684, October.
    3. Al-Najjar, Nabil & Anderlini, Luca & Felli, Leonardo, 2002. "Unforeseen contingencies," LSE Research Online Documents on Economics 3578, London School of Economics and Political Science, LSE Library.
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    5. Luca Anderlini & Leonardo Felli, 1994. "Incomplete Written Contracts: Undescribable States of Nature," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 1085-1124.
    6. Dekel, Eddie & Lipman, Barton L. & Rustichini, Aldo, 1998. "Recent developments in modeling unforeseen contingencies," European Economic Review, Elsevier, vol. 42(3-5), pages 523-542, May.
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    9. Al-Najjar, Nabil I. & Casadesus-Masanell, Ramon & Ozdenoren, Emre, 2003. "Probabilistic representation of complexity," Journal of Economic Theory, Elsevier, vol. 111(1), pages 49-87, July.
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    12. Ilya Segal, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 57-82.
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    Keywords

    undescribable events; incomplete contracts; finite invariance; fine variability;

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