Contractual traps

Ying-Ju Chen, Xiaojian Zhao
2009 Proceedings of the 11th Conference on Theoretical Aspects of Rationality and Knowledge - TARK '09  
In numerous economic scenarios, contracting parties may not have a clear picture of all the relevant aspects. While confronted with these unawareness issues, the strategic decisions of the contracting parties critically depend on their sophistication. A contracting party may be unaware of what she is entitled to determine. Therefore, she can only infer some missing pieces via the contract offered by other parties and determine whether to accept the contract based on her own evaluation of how
more » ... sonable the contract is. Further, a contracting party may actively gather information and collect evidence about all possible contingencies to avoid to be trapped into the contractual agreement. In this paper, we propose a general framework to investigate these strategic interactions with unawareness, reasoning, and cognition. We build our conceptual framework upon the classical principalagent relationship and compare the equilibrium behaviors under various degrees of the unaware agent's sophistication. Several implications regarding optimal contract design, possible exploitation, and cognitive thinking are also presented.
doi:10.1145/1562814.1562825 dblp:conf/tark/ChenZ09 fatcat:hxrq4kjtuvgn3gkwyocyqgchkq