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Contracts and Money

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Author Info
Boyan Jovanovic
Masako Ueda

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Abstract

We analyze the contractual relation between workers and their employers when there is nominal risk. The key feature of the problem is that the consumption deflator is random and observed sometime after the effort is exerted. The worker's effort is not observable, and to induce the agent to work, second-best contracts do not insure the worker fully. They do eliminate all nominal risk for the parties (by fully indexing the terms of the contracts to the price level) but they would be re-negotiated. Foreseeing this, the parties to the contract will write one that is renegotiation-proof. Under such a contract, nominal shocks affect real consumption. Since the argument should apply in many situations, it will have macroeconomic implications, one of which is short-run non-neutrality of money. We have found that surprise money is likely to redistribute consumption and welfare towards workers, and away from shareholders.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5637.

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Date of creation: Jun 1996
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Handle: RePEc:nbr:nberwo:5637

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E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

References listed on IDEAS
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  1. Eden, Benjamin, 1994. "The Adjustment of Prices to Monetary Shocks When Trade Is Uncertain and Sequential," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 493-509, June. [Downloadable!] (restricted)
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  3. Benabou, R., 1991. "Inflation and Markups: Theories and Evidence from the Retail Trade Sector," Working papers 587, Massachusetts Institute of Technology (MIT), Department of Economics.
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  4. Keane, Michael P, 1993. "Nominal-Contracting Theories of Unemployment: Evidence from Panel Data," American Economic Review, American Economic Association, vol. 83(4), pages 932-52, September. [Downloadable!] (restricted)
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  5. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July. [Downloadable!] (restricted)
  6. Azariadis, Costas, 1978. "Escalator clauses and the allocation of cyclical risks," Journal of Economic Theory, Elsevier, vol. 18(1), pages 119-155, June. [Downloadable!] (restricted)
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  9. Kaskarelis, Ioannis A, 1993. "Inflation and the Mark-Up in UK Manufacturing Industry," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(4), pages 391-407, November.
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  11. Chan, K. C. & Chen, Nai-fu & Hsieh, David A., 1985. "An exploratory investigation of the firm size effect," Journal of Financial Economics, Elsevier, vol. 14(3), pages 451-471, September. [Downloadable!] (restricted)
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  13. McLaughlin, Kenneth J., 1994. "Rigid wages?," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 383-414, December. [Downloadable!] (restricted)
  14. Rotemberg, Julio J, 1984. "A Monetary Equilibrium Model with Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 40-58, February. [Downloadable!] (restricted)
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  15. Chevalier, Judith A & Scharfstein, David S, 1995. "Liquidity Constraints and the Cyclical Behavior of Markups," American Economic Review, American Economic Association, vol. 85(2), pages 390-96, May. [Downloadable!] (restricted)
  16. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. [Downloadable!] (restricted)
  17. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September. [Downloadable!] (restricted)
  18. Card, David, 1990. "Unexpected Inflation, Real Wages, and Employment Determination in Union Contracts," American Economic Review, American Economic Association, vol. 80(4), pages 669-88, September. [Downloadable!] (restricted)
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  19. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 73(5), pages 871-80, December. [Downloadable!] (restricted)
  20. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)
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  22. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-48, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jean-Marc Tallon & Sujoy Mukerji, 2004. "Ambiguity aversion and the absence of wage indexation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00174562_v1, HAL. [Downloadable!]
    Other versions:
  2. Jovanovic, B. & Ueda, M., 1998. "Stock-Returns and Inflation in a Principal-Agent Economy," Working Papers 98-15, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
    Other versions:
  3. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  4. Antoine Martin & Cyril Monnet, 2000. "When should labor contracts be nominal?," Working Papers 603, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  5. Patrick Minford & Eric Nowell & Bruce Webb, 2003. "Nominal Contracting and Monetary Targets -- Drifting into Indexation," Economic Journal, Royal Economic Society, vol. 113(484), pages 65-100, January. [Downloadable!] (restricted)
  6. repec:att:wimass:199715 is not listed on IDEAS
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