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.
ASJC Scopus subject areas
- Economics and Econometrics