Al-Najjar, Nabil, Anderlini, Luca and Felli, Leonardo (2002) Unforeseen contingencies. TE/02/431. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, 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. |
| Library of Congress subject classification: | H Social Sciences > HB Economic Theory |
| Journal of Economic Literature Classification System: | 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 |
| Sets: | Research centres and groups > Financial Markets Group (FMG) Collections > Economists Online Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) Departments > Economics Collections > LSE Financial Markets Group (FMG) Working Papers |
| Identification Number: | TE/02/431 |
| Date Deposited: | 28 Feb 2008 |
| URL: | http://eprints.lse.ac.uk/3578/ |
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