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Unforeseen contingencies

Al-Najjar, Nabil, Anderlini, Luca and Felli, Leonardo (2002) Unforeseen contingencies. . Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.

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Abstract

We develop a model of unforeseen contingencies. These are contingencies that are understood by economic agents – their consequences and probabilities are known – but are such that every description of such events necessarily leaves out relevant features that have a non-negligible impact on the parties' expected utilities. Using a simple co-insurance problem as a backdrop, we introduce a model where states are described in terms of objective features, and the description of an event specifies a finite number of such features. In this setting, unforeseen contingencies are present in the coinsurance problem when the first-best risk-sharing contract varies with the states of nature in a complex way that makes it highly sensitive to the component features of the states. In this environment, although agents can compute expected pay-offs, they are unable to include in any ex-ante agreement a description of the relevant contingencies that captures (even approximately) the relevant complexity of the risky environment.

Item Type: Monograph (Discussion Paper)
Official URL: http://sticerd.lse.ac.uk/
Additional Information: © 2002 by the authors.
Divisions: Financial Markets Group
STICERD
Economics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C69 - Other
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D89 - Other
Date Deposited: 28 Feb 2008
Last Modified: 15 Sep 2023 22:52
URI: http://eprints.lse.ac.uk/id/eprint/3578

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