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Unpublished Paper
Lost in translation: honest misunderstandings and ex post disputes
Bond Business School Publications
  • Simon H Grant, Rice University
  • Jeffrey J Kline, Bond University
  • John Quiggin, University of Queensland
Date of this Version
9-20-2006
Document Type
Working Paper
Abstract

We give a formal treatment of optimal risk sharing contracts in the face of ambiguity. The central idea is that boundedly rational individuals do not have access to a language sufficiently rich to describe all possible states of nature. The ambiguity in a contract arises from contractual clauses that are interpreted by the parties in different ways. The cost of ambiguity is represented in terms of dispute costs. Taking the potential for dispute into account, we find that risk averse agents may forgo potential gains from risk sharing and choose incomplete contracts instead.

Citation Information
Simon H Grant, Jeffrey J Kline and John Quiggin. "Lost in translation: honest misunderstandings and ex post disputes" (2006)
Available at: http://works.bepress.com/jeffrey_kline/5/