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Differential awareness, ambiguity, and incomplete contracts: A model of contractual disputes

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  • Grant, Simon
  • Kline, J. Jude
  • Quiggin, John

Abstract

We focus on aspects of differential awareness that give rise to contractual disputes. Parties to a contract are boundedly rational as the state space available to them is coarser than the complete state space. Hence, they may disagree as to which state of the world has occurred, and therefore as to what actions are required by the contract. Such disagreement leads to disputes. We show that the agents may prefer simpler less ambiguous contracts when facing potential disputes.

Suggested Citation

  • Grant, Simon & Kline, J. Jude & Quiggin, John, 2012. "Differential awareness, ambiguity, and incomplete contracts: A model of contractual disputes," Journal of Economic Behavior & Organization, Elsevier, vol. 82(2), pages 494-504.
    • Handle: RePEc:eee:jeborg:v:82:y:2012:i:2:p:494-504
    DOI: 10.1016/j.jebo.2012.02.021
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    References listed on IDEAS

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    1. Heifetz, Aviad & Meier, Martin & Schipper, Burkhard C., 2013. "Dynamic unawareness and rationalizable behavior," Games and Economic Behavior, Elsevier, vol. 81(C), pages 50-68.
    2. Sujoy Mukerji & Jean-Marc Tallon, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(4), pages 883-904.
    3. Simon Grant & John Quiggin, 2013. "Inductive reasoning about unawareness," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(3), pages 717-755, November.
    4. Kim-Sau Chung & Oliver Board, 2007. "Object-Based Unawareness," Working Papers 2007-2, University of Minnesota, Department of Economics, revised 24 Aug 2007.
    5. Li, Jing, 2009. "Information structures with unawareness," Journal of Economic Theory, Elsevier, vol. 144(3), pages 977-993, May.
    6. Eric Maskin & Jean Tirole, 1999. "Unforeseen Contingencies and Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 83-114.
    7. Grant, Simon & Kajii, Atsushi, 1995. "A Cardinal Characterization of the Rubinstein-Safra-Thomson Axiomatic Bargaining Theory," Econometrica, Econometric Society, vol. 63(5), pages 1241-1249, September.
    8. Grant, Simon & Kline, J. Jude & Quiggin, John, 2014. "A matter of interpretation: Ambiguous contracts and liquidated damages," Games and Economic Behavior, Elsevier, vol. 85(C), pages 180-187.
    9. Halpern, Joseph Y. & Rego, Leandro Chaves, 2008. "Interactive unawareness revisited," Games and Economic Behavior, Elsevier, vol. 62(1), pages 232-262, January.
    10. Heifetz, Aviad & Meier, Martin & Schipper, Burkhard C., 2006. "Interactive unawareness," Journal of Economic Theory, Elsevier, vol. 130(1), pages 78-94, September.
    11. Oliver Board, 2008. "Object-Based Unawareness: Theory and Applications," Working Paper 378, Department of Economics, University of Pittsburgh, revised Mar 2009.
    12. repec:ecl:ucdeco:09-10 is not listed on IDEAS
    13. Chew Soo Hong & Jacob S. Sagi, 2006. "Event Exchangeability: Probabilistic Sophistication Without Continuity or Monotonicity," Econometrica, Econometric Society, vol. 74(3), pages 771-786, May.
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    15. Ilya Segal, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 57-82.
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    Citations

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    Cited by:

    1. Feinberg, Yossi, 2012. "Games with Unawareness," Research Papers 2122, Stanford University, Graduate School of Business.
    2. Ying Xue Li & Burkhard C. Schipper, 2024. "Raising Bidders' Awareness in Second-Price Auctions," Papers 2412.12676, arXiv.org.
    3. Liu, Zhen, 2016. "Games with incomplete information when players are partially aware of others’ signals," Journal of Mathematical Economics, Elsevier, vol. 65(C), pages 58-70.
    4. Grant, Simon & Kline, Jeff & Quiggin, John, 2011. "Ambiguous contracts: a syntactic approach," Risk and Sustainable Management Group Working Papers 153052, University of Queensland, School of Economics.
    5. Grant, Simon & Kline, J. Jude & Quiggin, John, 2014. "A matter of interpretation: Ambiguous contracts and liquidated damages," Games and Economic Behavior, Elsevier, vol. 85(C), pages 180-187.
    6. Grant, Simon & Jude Kline, J. & Quiggin, John, 2018. "Contracting under uncertainty: A principal–agent model with ambiguity averse parties," Games and Economic Behavior, Elsevier, vol. 109(C), pages 582-597.
    7. Surajeet Chakravarty & David Kelsey & Joshua C. Teitelbaum, 2018. "Tort Liability and Unawareness," Discussion Papers 1801, University of Exeter, Department of Economics.

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    More about this item

    Keywords

    Ambiguity; Bounded rationality; Expected uncertain utility; Incomplete contracts;
    All these keywords.

    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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