A Matter of Interpretation: Bargaining over Ambiguous Contracts

Simon Grant, Jeff Kline and John Quiggin

No 151190, Risk and Sustainable Management Group Working Papers from University of Queensland, School of Economics

Abstract: 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.

Keywords: Risk; and; Uncertainty (search for similar items in EconPapers)
Pages: 29
Date: 2009-11-05
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Citations: View citations in EconPapers (1)

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Working Paper: A Matter of Interpretation: Bargaining over Ambiguous Contracts (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uqsers:151190

DOI: 10.22004/ag.econ.151190

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