IDEAS home Printed from https://ideas.repec.org/p/wyi/wpaper/001970.html

Uncertainty Aversion and A Theory of Incomplete Contract

Author

Listed:
  • Chenghu Ma

Abstract

This paper is to provide a theoretical foundation of incomplete contract in an extensive game of multi-agent interaction. It aims to explain why rational agents may agree upon incomplete contracts even though it is costless to sign a complete one. It is argued that an incomplete contract creates strategic uncertainty. If agents’ attitudes toward uncertainty are not neutral, then an incomplete contract as final solution can be the consequence of common knowledge of rationality. This paper assumes that all agents are uncertainty averse in a sense of Gilboa and Schmeidler (1989); and that agents can form coalitions as part of strategic play. All these are embedded into a newly proposed equilibrium solution concept for extensive form game of perfect information.

Suggested Citation

  • Chenghu Ma, 2013. "Uncertainty Aversion and A Theory of Incomplete Contract," Working Papers 2013-10-14, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    • Handle: RePEc:wyi:wpaper:001970
    as

    Download full text from publisher

    File URL: https://econpub.xmu.edu.cn/research/repec/upload/200739457347055475115776.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ma, Chenghu, 2000. "Uncertainty aversion and rationality in games of perfect information," Journal of Economic Dynamics and Control, Elsevier, vol. 24(3), pages 451-482, March.
    2. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    3. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    4. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    5. Eichberger, J. & Kelsey, D., 1994. "Non-additive beliefs and game theory," Other publications TiSEM 3807376a-1fcc-4646-9021-9, Tilburg University, School of Economics and Management.
    6. Luo, Xiao & Ma, Chenghu, 2001. "Stable equilibrium in beliefs in extensive games with perfect information," Journal of Economic Dynamics and Control, Elsevier, vol. 25(11), pages 1801-1825, November.
    7. Lo, Kin Chung, 1996. "Equilibrium in Beliefs under Uncertainty," Journal of Economic Theory, Elsevier, vol. 71(2), pages 443-484, November.
    8. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
    9. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-785, July.
    10. Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-1231, December.
    11. Dow James & Werlang Sergio Ribeiro Da Costa, 1994. "Nash Equilibrium under Knightian Uncertainty: Breaking Down Backward Induction," Journal of Economic Theory, Elsevier, vol. 64(2), pages 305-324, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lang, Matthias & Wambach, Achim, 2013. "The fog of fraud – Mitigating fraud by strategic ambiguity," Games and Economic Behavior, Elsevier, vol. 81(C), pages 255-275.
    2. Kin Chung Lo, 1998. "Epistemic Conditions for Agreement and Stochastic Independence of epsilon-Contaminated Beliefs," Working Papers 1998_02, York University, Department of Economics.
    3. Werlang, Sérgio Ribeiro da Costa, 2000. "A notion of subgame perfect Nash equilibrium under knightian uncertainty," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 376, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    4. Lo, Kin Chung, 2000. "Epistemic conditions for agreement and stochastic independence of [epsi]-contaminated beliefs," Mathematical Social Sciences, Elsevier, vol. 39(2), pages 207-234, March.
    5. Luo, Xiao & Ma, Chenghu, 2001. "Stable equilibrium in beliefs in extensive games with perfect information," Journal of Economic Dynamics and Control, Elsevier, vol. 25(11), pages 1801-1825, November.
    6. Jürgen Eichberger & David Kelsey, 1999. "E-Capacities and the Ellsberg Paradox," Theory and Decision, Springer, vol. 46(2), pages 107-138, April.
    7. Lo, Kin Chung, 1999. "Extensive Form Games with Uncertainty Averse Players," Games and Economic Behavior, Elsevier, vol. 28(2), pages 256-270, August.
    8. Riedel, Frank & Sass, Linda, 2016. "The strategic use of ambiguity," Center for Mathematical Economics Working Papers 452, Center for Mathematical Economics, Bielefeld University.
    9. Luo, Xiao & Ma, Chenghu, 2003. ""Agreeing to disagree" type results: a decision-theoretic approach," Journal of Mathematical Economics, Elsevier, vol. 39(8), pages 849-861, November.
    10. Patrick Gonzàlez, 2004. "Investment and Screening Under Asymmetric Endogenous Information," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 502-519, Autumn.
    11. Jian Yang, 2015. "Game-theoretic Modeling of Players' Ambiguities on External Factors," Papers 1510.06812, arXiv.org, revised Apr 2017.
    12. Marinacci, Massimo, 2000. "Ambiguous Games," Games and Economic Behavior, Elsevier, vol. 31(2), pages 191-219, May.
    13. Takao Asano, 2004. "Portfolio Inertia and ε-Contaminations," ISER Discussion Paper 0610, Institute of Social and Economic Research, The University of Osaka.
    14. David Kelsey & Sara Roux, 2015. "An experimental study on the effect of ambiguity in a coordination game," Theory and Decision, Springer, vol. 79(4), pages 667-688, December.
    15. Lo, Kin Chung, 2009. "Correlated Nash equilibrium," Journal of Economic Theory, Elsevier, vol. 144(2), pages 722-743, March.
    16. Ronald Stauber, 2019. "A strategic product for belief functions," ANU Working Papers in Economics and Econometrics 2019-668, Australian National University, College of Business and Economics, School of Economics.
    17. Jürgen Eichberger & David Kelsey & Burkhard Schipper, 2008. "Granny Versus Game Theorist: Ambiguity in Experimental Games," Theory and Decision, Springer, vol. 64(2), pages 333-362, March.
    18. Hendon, Ebbe & Jacobsen, Hans Jorgen & Sloth, Birgitte & Tranaes, Torben, 1996. "The product of capacities and belief functions," Mathematical Social Sciences, Elsevier, vol. 32(2), pages 95-108, October.
    19. Gaurab Aryal & Ronald Stauber, 2014. "Trembles in extensive games with ambiguity averse players," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(1), pages 1-40, September.
    20. Stauber, Ronald, 2017. "Irrationality and ambiguity in extensive games," Games and Economic Behavior, Elsevier, vol. 102(C), pages 409-432.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wyi:wpaper:001970. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: WISE Technical Team (email available below). General contact details of provider: https://www.wise.xmu.edu.cn/english/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.