Ambiguity aversion and incompleteness of contractual form
Ambiguity aversion and incompleteness of contractual form
Subjective uncertainty is characterized by ambiguity if the decision maker has an imprecise knowledge of the probabilities of payoff relevant events. In such an instance, the decision maker's beliefs are better represented by a set of probability functions than by a unique probability function. An ambiguity averse decision maker adjusts his choice on the side of caution in response to his imprecise knowledge of the odds. The non-additive expected utility model allows a formal characterization of such behaviour. Using this model, this paper shows that ambiguity aversion can explain the existence of incomplete contracts. The setting for the demonstration is the investment hold-up model which has been the focus of much of the recent research on the implications of incomplete contracts.
University of Southampton
Mukerji, S.
5b1e8781-5e5c-4969-b01c-6567bf971aa7
January 1997
Mukerji, S.
5b1e8781-5e5c-4969-b01c-6567bf971aa7
Mukerji, S.
(1997)
Ambiguity aversion and incompleteness of contractual form
(Discussion Papers in Economics and Econometrics, 9715)
Southampton, UK.
University of Southampton
Record type:
Monograph
(Discussion Paper)
Abstract
Subjective uncertainty is characterized by ambiguity if the decision maker has an imprecise knowledge of the probabilities of payoff relevant events. In such an instance, the decision maker's beliefs are better represented by a set of probability functions than by a unique probability function. An ambiguity averse decision maker adjusts his choice on the side of caution in response to his imprecise knowledge of the odds. The non-additive expected utility model allows a formal characterization of such behaviour. Using this model, this paper shows that ambiguity aversion can explain the existence of incomplete contracts. The setting for the demonstration is the investment hold-up model which has been the focus of much of the recent research on the implications of incomplete contracts.
This record has no associated files available for download.
More information
Published date: January 1997
Additional Information:
Revised version of Discussion Paper 9616
Identifiers
Local EPrints ID: 33189
URI: http://eprints.soton.ac.uk/id/eprint/33189
PURE UUID: e8227007-d5e1-41b1-931f-6b526edc137f
Catalogue record
Date deposited: 25 Jan 2008
Last modified: 11 Dec 2021 15:19
Export record
Contributors
Author:
S. Mukerji
Download statistics
Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.
View more statistics