Risk and Uncertainty Program

We focus on syntactic aspects of di¤erential 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. JEL Classi…cation: D80, D82 Key words: ambiguity, bounded rationality, expected uncertain utility, incomplete contracts Simon Grant Rice University and University of Queensland Je¤ Kline University of Queensland (Corresponding Author [email protected], +61 7 336 56470) John Quiggin School of Economics, University of Queensland, Brisbane 4072, Australia We thank Bob Brito, Roger Myerson, Ben Polak, Larry Sameulson, Max Stinchcombe, Matthew Ryan, Nancy Wallace, participants at the 2nd Asian Decentralization Conference, at the 5th Pan-Paci…c Conference on Game Theory, at ESAM2009, at LGS6 and at UT’s Murray S. Johnson Conference on Bounded Rationality in Economic Theory for helpful comments and criticism.