While unforeseen contingencies – possible events that agents do not think of when planning or contracting – are often said to greatly affect the nature of contracting, we lack useful formal models. Most of the existing models boil down to assuming that agents give zero probability to some events that might actually occur, an approach which is not particularly useful for studying the effects of unforeseen contingencies on contracting.
KeywordsControl rights Expected utility Incomplete contracts Long-term and short-term contracts Probability Rationality, bounded Short-term contracts Uncertainty Unforeseen contingencies
The author would like to thank Eddie Dekel, Jing Li, Aldo Rustichini, and Marie- Odile Yanelle for discussions and comments.
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