When two parties engage in a relationship, it is often the case that they are uncertain about the value of some parameter that will affect their future gains from trade. This uncertainty is represented by assuming that the parameter can take several values, each value corresponding to different states of nature whose probability distribution is common knowledge. In this chapter the parameter will take two values. Even though they will both learn the value of the parameter in the future, the trading partners cannot write ex ante contracts contingent on the state of nature, because this state of nature is not verifiable by a third party, a benevolent court of law, that could enforce their contract. As the following quote from Williamson (1975) suggests, such situations might entail transaction costs:
Both buyer and seller have identical information and assume, further-
more, that this information is entirely sufficient for the transaction to be
completed. Such exchanges might nevertheless experience difficulty if,
despite identical information, one agent makes representations that the
true state of the world is different than both parties know it to be and if
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Publication information: Book title: The Theory of Incentives: The Principal-Agent Model. Contributors: Jean-Jacques Laffont - Author, David Martimort - Author. Publisher: Princeton University Press. Place of publication: Princeton, NJ. Publication year: 2002. Page number: 240.
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