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Lost in Translation: Honest Misunderstandings and Ex Post Disputes

Author

Listed:
  • Simon Grant

    (Department of Economics, Rice University)

  • Jeff Kline

    (Bond University)

  • John Quiggin

    (Department of Economics, University of Queensland)

Abstract

We give a formal treatment of optimal risk sharing contracts in the face of ambiguity. The central idea is that boundedly rational individuals do not have access to a language sufficiently rich to describe all possible states of nature. The ambiguity in a contract arises from contractual clauses that are interpreted by the parties in different ways. The cost of ambiguity is represented in terms of dispute costs. Taking the potential for dispute into account, we find that risk averse agents may forgo potential gains from risk sharing and choose incomplete contracts instead.

Suggested Citation

  • Simon Grant & Jeff Kline & John Quiggin, 2006. "Lost in Translation: Honest Misunderstandings and Ex Post Disputes," Risk & Uncertainty Working Papers WP3R06, Risk and Sustainable Management Group, University of Queensland.
    • Handle: RePEc:rsm:riskun:r06_3
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    File URL: http://www.uq.edu.au/rsmg/WP/WPR06_3.pdf
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    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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