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Transaction Costs and the Robustness of the Coase Theorem

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.

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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~03-03-28.

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Date of creation: 28 Mar 2003
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Handle: RePEc:geo:guwopa:gueconwpa~03-03-28
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Georgetown University Department of Economics Washington, DC 20057-1036

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Order Information: Postal: Roger Lagunoff Professor of Economics Georgetown University Department of Economics Washington, DC 20057-1036
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  1. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
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  8. Dixit, Avinash & Olson, Mancur, 2000. "Does voluntary participation undermine the Coase Theorem?," Journal of Public Economics, Elsevier, vol. 76(3), pages 309-335, June.
  9. Ariel Rubinstein & Asher Wolinsky, 1990. "Renegotiation-Proof Implementation and Time Preferences," STICERD - Theoretical Economics Paper Series 215, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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  12. Abrea Dilip & Pearce David & Stacchetti Ennio, 1993. "Renegotiation and Symmetry in Repeated Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 217-240, August.
  13. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  14. Jong-Il Kim & Lawrence J. Lau, 1996. "The sources of Asian Pacific economic growth," Canadian Journal of Economics, Canadian Economics Association, vol. 29(s1), pages 448-54, April.
  15. Joseph Farrell and Eric Maskin., 1987. "Renegotiation in Repeated Games," Economics Working Papers 8759, University of California at Berkeley.
  16. Dilip Abreu & David Pearce & Ennio Stacchetti, 1989. "Renegotiation and Symmetry in Repeated Games," STICERD - Theoretical Economics Paper Series 198, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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