Contractual traps

Ying Ju Chen, Xiaojian Zhao

Research output: Chapter in Book/Report/Conference proceedingConference PaperOtherpeer-review

1 Citation (Scopus)

Abstract

In numerous economic scenarios, contracting parties may not have a clear picture of all the relevant aspects. While confronted with these unawareness issues, the strategic decisions of the contracting parties critically depend on their sophistication. A contracting party may be unaware of what she is entitled to determine. Therefore, she can only infer some missing pieces via the contract offered by other parties and determine whether to accept the contract based on her own evaluation of how reasonable the contract is. Further, a contracting party may actively gather information and collect evidence about all possible contingencies to avoid to be trapped into the contractual agreement. In this paper, we propose a general framework to investigate these strategic interactions with unawareness, reasoning, and cognition. We build our conceptual framework upon the classical principal agent relationship and compare the equilibrium behaviors under various degrees of the unaware agent's sophistication. Several implications regarding optimal contract design, possible exploitation, and cognitive thinking are also presented.

Original languageEnglish
Title of host publicationProceedings of the 12th Conference on Theoretical Aspects of Rationality and Knowledge
Place of PublicationNew York NY USA
PublisherAssociation for Computing Machinery (ACM)
Pages51-60
Number of pages10
Edition1st
ISBN (Print)9781605585604
DOIs
Publication statusPublished - 9 Nov 2009
Externally publishedYes
EventConference on Theoretical Aspects of Rationality and Knowledge 2009 - Pacific Grove, United States of America
Duration: 6 Jul 20098 Jul 2009
Conference number: 12th

Conference

ConferenceConference on Theoretical Aspects of Rationality and Knowledge 2009
Abbreviated titleTARK 2009
CountryUnited States of America
CityPacific Grove
Period6/07/098/07/09

Keywords

  • Cognition
  • Incomplete contracts
  • Principal-agent relationship JEL classiffication: D86, D82, D83
  • Unawareness

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