Incorporating Unawareness into Contract Theory

Emel Filiz Ozbay , Games and Economic Behavior 76(1) , 181-194 , September 2012.

Asymmetric awareness of the contracting parties regarding the uncertainty surrounding them is proposed as a reason for incompleteness in contractual forms. An insurance problem is studied between a risk neutral insurer, who has superior awareness regarding the nature of the uncertainty, and a risk averse insuree, who cannot foresee all the relevant contingencies. The insurer can mention in a contract some contingencies that the insuree was originally unaware of. It is shown that there are equilibria where the insurer strategically oers incomplete contracts. Competition among insurers who are symmetrically aware of the uncertainty promotes awareness of the insuree.

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