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Ambiguity aversion and the absence of wage indexation

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  • Jean-Marc Tallon

    ()
    (EUREQUA - Equipe Universitaire de Recherche en Economie Quantitative - CNRS : UMR8594 - Université Paris I - Panthéon-Sorbonne)

  • Sujoy Mukerji

    (University of Oxford (UK) - University of Oxford (UK))

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    Abstract

    This paper analyzes optimal wage contracting assuming agents are not subjective expectedutility maximizers but are, instead, ambiguity (or uncertainty) averse decision makers whomaximize Choquet expected utility. We show that such agents will choose not to include anyindexation coverage in their wage contracts even when inflation is uncertain, unless theperceived inflation uncertainty is high enough. Significantly, the exercise does not presume anyexogenous costs (e.g., transactions costs) of including indexation links

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    Bibliographic Info

    Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00174562.

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    Date of creation: 2004
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    Publication status: Published, Journal of Monetary Economics, 2004, 653-670
    Handle: RePEc:hal:cesptp:halshs-00174562

    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00174562
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    Related research

    Keywords: ambiguity aversion; indexation;

    References

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    1. Card, David, 1986. "An Empirical Model of Wage Indexation Provisions in Union Contracts," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S144-75, June.
    2. Sujoy Mukerji & Jean-Marc Tallon, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00174539, HAL.
    3. Sujoy Mukerji & Jean-Marc Tallon, 2000. "Ambiguity Aversion and the Absence of Indexed Debt," Economics Series Working Papers 28, University of Oxford, Department of Economics.
    4. Sujoy Mukerji & Jean-Marc Tallon, 2000. "Ambiguity Aversion and Incompleteness of Financial Markets," Economics Series Working Papers 46, University of Oxford, Department of Economics.
    5. Tallon, Jean-Marc, 1998. "Asymmetric Information, Nonadditive Expected Utility, and the Information Revealed by Prices: An Example," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 329-42, May.
    6. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
    7. Hansen, Lars Peter & Sargent, Thomas J & Tallarini, Thomas D, Jr, 1999. "Robust Permanent Income and Pricing," Review of Economic Studies, Wiley Blackwell, vol. 66(4), pages 873-907, October.
    8. Boyan Jovanovic & Masako Ueda, 1996. "Contracts and Money," NBER Working Papers 5637, National Bureau of Economic Research, Inc.
    9. Fischer, Stanley, 1977. "Wage indexation and macroeconomics stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 107-147, January.
    10. Dow, James & Werlang, Sergio Ribeiro da Costa, 1992. "Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio," Econometrica, Econometric Society, vol. 60(1), pages 197-204, January.
    11. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
    12. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
    13. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
    14. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    15. Farber, Henry S, 1978. "Individual Preferences and Union Wage Determination: The Case of the United Mine Workers," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 923-42, October.
    16. Robert J. Shiller, 1997. "Public Resistance to Indexation: A Puzzle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 159-228.
    17. Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-31, December.
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    Cited by:
    1. Jianjun Miao & Neng Wang, 2007. "Risk, Uncertainty, and Option Exercise," Boston University - Department of Economics - Working Papers Series WP2007-016, Boston University - Department of Economics.
    2. Jianjun Miao & Dirk Hackbarth, 2011. "The dynamics of mergers and acquisitions in oligopolistic industries," Boston University - Department of Economics - Working Papers Series WP2011-029, Boston University - Department of Economics.
    3. Shin-ichi Fukuda, 2008. "Knightian Uncertainty and Poverty Trap in a Model of Economic Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 652-663, July.
    4. Fujikawa, Takemi, 2009. "The hot stove effect in repeated-play decision making under ambiguity," MPRA Paper 17647, University Library of Munich, Germany.
    5. Scott Condie & Jayant Ganguli, 2011. "Informational efficiency with ambiguous information," Economic Theory, Springer, vol. 48(2), pages 229-242, October.

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