Unforeseen contingencies

Nabil Al-Najjar, Luca Anderlini and Leonardo Felli

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We develop a model of unforeseen contingencies. These are contingencies that are understood by economic agents – their consequences and probabilities are known – but are such that every description of such events necessarily leaves out relevant features that have a non-negligible impact on the parties' expected utilities. Using a simple co-insurance problem as a backdrop, we introduce a model where states are described in terms of objective features, and the description of an event specifies a finite number of such features. In this setting, unforeseen contingencies are present in the coinsurance problem when the first-best risk-sharing contract varies with the states of nature in a complex way that makes it highly sensitive to the component features of the states. In this environment, although agents can compute expected pay-offs, they are unable to include in any ex-ante agreement a description of the relevant contingencies that captures (even approximately) the relevant complexity of the risky environment.

Keywords: Unforeseen contingencies; incomplete contracts; finite invariance; fine variability (search for similar items in EconPapers)
JEL-codes: C69 D81 D89 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2002-02
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http://eprints.lse.ac.uk/3578/ Open access version. (application/pdf)

Related works:
Working Paper: Unforeseen Contingencies (2002)
Working Paper: Unforeseen Contingencies (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:3578

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