Incorporating unawareness into contract theory

Asymmetric awareness of the contracting parties regarding the uncertainty surrounding them is proposed as a reason for incompleteness in contractual forms. An insurance problem is studied between a risk neutral insurer, who has superior awareness regarding the nature of the uncertainty, and a risk a...

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Veröffentlicht in:Games and economic behavior 2012-09, Vol.76 (1), p.181-194
1. Verfasser: Filiz-Ozbay, Emel
Format: Artikel
Sprache:eng
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Zusammenfassung:Asymmetric awareness of the contracting parties regarding the uncertainty surrounding them is proposed as a reason for incompleteness in contractual forms. An insurance problem is studied between a risk neutral insurer, who has superior awareness regarding the nature of the uncertainty, and a risk averse insuree, who cannot foresee all the relevant contingencies. The insurer can mention in a contract some contingencies that the insuree was originally unaware of. It is shown that there are equilibria where the insurer strategically offers incomplete contracts. Competition among insurers who are symmetrically aware of the uncertainty promotes awareness of the insuree. ► We model an asymmetric awareness model in an insurance setting. ► Incomplete contracts are strategically chosen by a monopolistic insurer with superior awareness. ► It is shown that competition among insurers promotes awareness of the insuree.
ISSN:0899-8256
1090-2473
DOI:10.1016/j.geb.2012.05.009