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Unforeseen contingencies

By Nabil Al-Najjar, Luca Anderlini and Leonardo Felli

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

Topics: HB Economic Theory
Publisher: Centre for Economic Policy Research
Year: 2002
OAI identifier: oai:eprints.lse.ac.uk:5349
Provided by: LSE Research Online
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