Uncertainty Aversion and A Theory of Incomplete Contract

Chenghu Ma

No 2013-10-14, Working Papers from Wang Yanan Institute for Studies in Economics (WISE), Xiamen University

Abstract: This paper is to provide a theoretical foundation of incomplete contract in an extensive game of multi-agent interaction. It aims to explain why rational agents may agree upon incomplete contracts even though it is costless to sign a complete one. It is argued that an incomplete contract creates strategic uncertainty. If agents’ attitudes toward uncertainty are not neutral, then an incomplete contract as final solution can be the consequence of common knowledge of rationality. This paper assumes that all agents are uncertainty averse in a sense of Gilboa and Schmeidler (1989); and that agents can form coalitions as part of strategic play. All these are embedded into a newly proposed equilibrium solution concept for extensive form game of perfect information.

Keywords: uncertainty aversion; strategic uncertainty; coalitionformation; stability and core-criterion. (search for similar items in EconPapers)
JEL-codes: C70 C71 C72 (search for similar items in EconPapers)
Date: 2013-10-14
New Economics Papers: this item is included in nep-cta, nep-gth and nep-upt
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