A Matter of Interpretation: Ambiguous Contracts and Liquidated Damages

We focus on syntactic aspects of differential awareness that give rise to contractual disputes. Boundedly rational parties use a common language, but do not share a common understanding of the world, leading to ambiguity in both syntactic and semantic forms. In contractual relationships, ambiguity leads to disagreement and disputes. We show that the agents may prefer simpler less ambiguous contracts when facing potential disputes. In particular, parties may prefer liquidated damages provisions to contractual terms that specify a more complex risk allocation.


Issue Date:
Sep 20 2011
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/151198
Total Pages:
23
JEL Codes:
D80; D82
Series Statement:
Risk and Uncertainty Program
R11/4




 Record created 2017-04-01, last modified 2017-04-26

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