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Unforeseen contingencies

  • Nabil Al-Najjar
  • Luca Anderlini
  • Leonardo Felli

We develop a model of unforeseen contingencies. These are contingencies that are understood by economic agents – their consequences and probabilities are known – but are such that every description of such events necessarily leaves out relevant features that have a non-negligible impact on the parties' expected utilities. Using a simple co-insurance problem as a backdrop, we introduce a model where states are described in terms of objective features, and the description of an event specifies a finite number of such features. In this setting, unforeseen contingencies are present in the coinsurance problem when the first-best risk-sharing contract varies with the states of nature in a complex way that makes it highly sensitive to the component features of the states. In this environment, although agents can compute expected pay-offs, they are unable to include in any ex-ante agreement a description of the relevant contingencies that captures (even approximately) the relevant complexity of the risky environment.

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File URL: http://eprints.lse.ac.uk/3578/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 3578.

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Length: 50 pages
Date of creation: Feb 2002
Date of revision:
Handle: RePEc:ehl:lserod:3578
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Web page: http://www.lse.ac.uk/

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  1. Anderlini, Luca & Felli, Leonardo, 1998. "Describability and agency problems," European Economic Review, Elsevier, vol. 42(1), pages 35-59, January.
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