co-authors: Nabil I. Al-Najjar, (Northwestern University) and Luca Anderlini, (Georgetown University).
status: The Review of Economic Studies, 73, October 2006, 849-868.
Abstract: We develop a model of undescribable events. Examples of events that are well understood by economic agents but are prohibitively difficult to describe in advance abound in real-life. This notion has also pervaded a substantial amount of economic literature.
Undescribable events in our model are understood by economic agents — their consequences and probabilities are known — but are such that every finite description of such events necessarily leaves out relevant features that have a non-negligible impact on the parties’ expected utilities.
We illustrate our results using a simple coinsurance problem as a backdrop. When the only uncertainty faced by the two agents is an undescribable event the optimal finite coinsurance contract is no contract at all.
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