A Matter of Interpretation: Bargaining over Ambiguous Contracts

We present a formal treatment of contracting in the face of ambiguity. The central idea is that boundedly rational individuals will not always interpret the same situation in the same way. More specifically, even with well defined contracts, the precise actions to be taken by each party to the contract might be disputable. Taking this potential for dispute into account, we analyze the effects of ambiguity on contracting. We find that risk averse agents will engage in ambiguous contracts for risk sharing reasons. We provide an application where ambiguity motivates the use of a liquidated damages contract.


Issue Date:
Nov 05 2009
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/151190
Total Pages:
29
JEL Codes:
D80; D82
Series Statement:
Risk and Uncertainty Program
R09/3




 Record created 2017-04-01, last modified 2017-08-27

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