On indescribable contingencies and incomplete contracts

摘要

I examine the theoretical foundations underlying the incomplete contracts literature. A common justification for the assumption that contracts are not fully contingent on the state of nature is to point out that some aspects of the state may be unforeseen or indescribable to the contracting partners at the time the contract is written. I argue, however, that as long as risk-averse parties can foresee the probabilities of their possible payoffs, then the fact that they cannot describe the possible physical states does not matter; even with renegotiation, the parties can attain the same welfare as when full description is possible.