A Matter of Interpretation: Bargaining over Ambiguous Contracts

Simon Grant, Jeffrey Kline and John Quiggin

No WPR09_3, Risk & Uncertainty Working Papers from Risk and Sustainable Management Group, University of Queensland

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: ambiguity; bounded rationality; expected uncertain utility; incomplete contracts; liquidated damages. (search for similar items in EconPapers)
JEL-codes: D80 D82 (search for similar items in EconPapers)
Date: 2009-11
New Economics Papers: this item is included in nep-bec, nep-cbe and nep-upt
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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:rsm:riskun:r09_3

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