Indescribability and its irrelevance for contractual incompleteness

• Main Author: KUNIMOTO, Takashi
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2010
• Subjects: Asymmetric information; Bayesian implementation; Incentive compatibility; Incomplete contracts; Indescribability; Individual rationality; Irrelevance theorem; Economics; Economic Theory
• Online Access: https://ink.library.smu.edu.sg/soe_research/1987; https://ink.library.smu.edu.sg/context/soe_research/article/2986/viewcontent/101007_2Fs10058_009_0082_y.pdf
• Institution: Singapore Management University

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