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Review of Economic Design

, Volume 14, Issue 3–4, pp 271–289 | Cite as

Indescribability and its irrelevance for contractual incompleteness

  • Takashi KunimotoEmail author
Original Paper
  • 73 Downloads

Abstract

The incomplete contracts literature often cites indescribable contingencies as a major obstacle to the creation of complete contracts. 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 incompleteness as 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 presence of asymmetric information at the trading stage, as long as there is symmetric information at the contracting stage. This is an important clarification because Kunimoto (Econ Lett 99:367–370, 2008) shows that indescribability can matter if there is asymmetric information at both stages. It is thus argued that asymmetric information at the contracting stage is necessary for indescribability to be important in the rational agents contracting model.

Keywords

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

JEL Classification

C72 D78 D82 

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Copyright information

© Springer-Verlag 2009

Authors and Affiliations

  1. 1.Department of EconomicsMcGill UniversityMontrealCanada
  2. 2.CIREQMontrealCanada

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