Publication Type

Journal Article

Publication Date

9-2010

Abstract

The incomplete contracts literature often cites indescribable contingencies as a major obstacle to the creation of completecontracts. Using agents’ minimum foresight concerning possible future payoffs, Maskin and Tirole (Rev Econ Stud 66:83–114, 1999) show that indescribability does not matter for contractual incompletenessas long as there is symmetric information at both the contracting stage and the trading stage. This is called the irrelevance theorem. The following generalization of the irrelevance theorem is shown here: indescribability does not matter even in the presenceof asymmetric information at the trading stage, as long as there is symmetric information at the contracting stage. This isan important clarification because Kunimoto (Econ Lett 99:367–370, 2008) shows that indescribability can matter if there isasymmetric information at both stages. It is thus argued that asymmetric information at the contracting stage is necessary for indescribability to be importantin the rational agents contracting model.KeywordsAsymmetric information-Bayesian implementation-Incentive compatibility-Incomplete contracts-Indescribability-Individual rationality-Irrelevance theoremJEL

Keywords

Asymmetric information, Bayesian implementation, Incentive compatibility, Incomplete contracts, Indescribability, Individual rationality, Irrelevance theorem

Discipline

Economics | Economic Theory

Research Areas

Economic Theory

Publication

Review of Economic Design

Volume

14

Issue

1

First Page

271

Last Page

289

ISSN

1434-4742

Identifier

10.1007/s10058-009-0082-y

Publisher

Springer Verlag (Germany)

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://doi.org./10.1007/s10058-009-0082-y

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