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Ambiguity aversion and incompleteness of contractual form

  • Mukerji, S.

Subjective uncertainty is characterized by ambiguity if the decision maker has an imprecise knowledge of the probabilities of payoff relevant events. In such an instance, the decision maker's beliefs are better represented by a set of probability functions than by a unique probability function. An ambiguity averse decision maker adjusts his choice on the side of caution in response to his imprecise knowledge of the odds. The non-additive expected utility model allows a formal characterization of such behaviour. Using this model, this paper shows that ambiguity aversion can explain the existence of incomplete contracts. The setting for the demonstration is the investment hold-up model which has been the focus of much of the recent research on the implications of incomplete contracts. Revised version of Discussion Paper 9616

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Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 9715.

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Date of creation: 01 Jan 1997
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Handle: RePEc:stn:sotoec:9715
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  1. Maurice Obstfeld & Kenneth Rogoff, 1994. "The Intertemporal Approach to the Current Account," NBER Working Papers 4893, National Bureau of Economic Research, Inc.
  2. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
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  5. Marin, Dalia, 1992. "Is the Export-led Growth Hypothesis Valid for Industrialized Countries?," Munich Reprints in Economics 3112, University of Munich, Department of Economics.
  6. Nason, James M & Rogers, John H, 2002. "Investment and the Current Account in the Short Run and the Long Run," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(4), pages 967-86, November.
  7. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  8. Gonzalo, J. & Granger, C., 1992. "Estimation of Common Long-Memory Components in Cointegrated Systems," Papers 4, Boston University - Department of Economics.
  9. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
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