Bargaining under uncertainty - the problem of risky contracts

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Project objective

My research examines the impact of risk on bargaining outcomes. In all previous bargaining models the players can implement any agreement exactly and with certainty. But in reality only the expected payoffs are agreed and these are usually subject to ex post uncertainty. For example, inflation makes nominal wage bargains risky; the exact profits of joint-ventures between firms are unknown. I find that this uncertainty affects bargained outcomes in unexpected ways - inequalities in bargaining relationships tend to be offset and risk-averse players may actually prefer more risky contracts. This model can therefore be used to analyse parties' incentives in writing contracts: risk-averse parties may find it desirable to make a contract deliberately ambiguous, or to conclude an agreement before uncertainty is resolved. This provides a potential explanation for incomplete contracts JEL Classification : C78, D89, D23 Keywords : Bargaining, Uncertainty, Incomplete Contracts.

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Participants

• INSTITUT D'ECONOMIE INDUSTRIELLE · TOULOUSECoordinatorFrance
• Not availableCity levelUnited Kingdom

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