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Externalities from Contract Length

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Author Info
Ball, Laurence Markham
Abstract

An increase in the length of a firm's labor contract contributes to rigidity in the aggregate price level. This increases the variance of aggregate demand but decreases the variance of other firms' real wages. Under certain conditions, the net effect is to increase the variance of other firms' employment. This negative externality implies that the equilibrium contract length in a decentralized economy is greater than the social optimum-in other words, wages are too rigid. Copyright 1987 by American Economic Association.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 77 (1987)
Issue (Month): 4 (September)
Pages: 615-29
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Handle: RePEc:aea:aecrev:v:77:y:1987:i:4:p:615-29

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  1. Lars Calmfors, 2001. "Wages and Wage-Bargaining Institutions in the EMU – A Survey of the Issues," Empirica, Springer, vol. 28(4), pages 325-351, December. [Downloadable!] (restricted)
  2. Carlos Borondo, 1994. "La rigidez nominal de los precios de la Nueva Economía Keynesiana: una panorámica," Investigaciones Economicas, Fundación SEPI, vol. 18(2), pages 245-288, May. [Downloadable!]
  3. Calmfors, Lars, 2001. "Wages and wage-bargaining institutions in the EMU – a survey of the issues," Seminar Papers 690, Stockholm University, Institute for International Economic Studies. [Downloadable!]
  4. Groth, Charlotta & Johansson, Åsa, 2002. "Bargaining Structure and Nominal Wage Flexibility," Seminar Papers 709, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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  5. David Romer, 1989. "Staggered Price Setting with Endogenous Frequency of Adjustment," NBER Working Papers 3134, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Lars Calmfors & Giancarlo Corsetti & Seppo Honkapohja & John Kay & Willi Leibfritz & Gilles Saint-Paul & Hans-Werner Sinn & Xavier Vives, 2004. "Pay-setting Systems in Europe: On-going Development and Possible Reforms," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 61-83, October. [Downloadable!]
  7. Laurence Ball, 1993. "What Determines the Sacrifice Ratio?," NBER Working Papers 4306, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Calmfors, Lars & Johansson, Asa, 2001. "Unemployment Benefits, Contract Length and Nominal Wage Flexibility," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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