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Ambiguity aversion and the absence of wage indexation

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  • Mukerji, Sujoy
  • Tallon, Jean-Marc

Abstract

This paper analyzes optimal wage contracting assuming agents are not subjective expected utility maximizers but are, instead, ambiguity (or uncertainty) averse decision makers who maximize Choquet expected utility. We show that such agents will choose not to include any indexation coverage in their wage contracts even when inflation is uncertain, unless the perceived inflation uncertainty is high enough. Significantly, the exercise does not presume any exogenous costs (e.g. transactions costs) of including indexation links.
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  • Mukerji, Sujoy & Tallon, Jean-Marc, 2004. "Ambiguity aversion and the absence of wage indexation," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 653-670, April.
  • Handle: RePEc:eee:moneco:v:51:y:2004:i:3:p:653-670
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fujikawa, Takemi, 2009. "The hot stove effect in repeated-play decision making under ambiguity," MPRA Paper 17647, University Library of Munich, Germany.
    2. Miao, Jianjun & Wang, Neng, 2011. "Risk, uncertainty, and option exercise," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 442-461, April.
    3. Perron, Pierre & Wada, Tatsuma, 2009. "Let's take a break: Trends and cycles in US real GDP," Journal of Monetary Economics, Elsevier, pages 749-765.
    4. Gottardi, Piero & Tallon, Jean Marc & Ghirardato, Paolo, 2017. "Flexible contracts," Games and Economic Behavior, Elsevier, pages 145-167.
    5. Liam Graham & Dennis J. Snower, 2008. "Hyperbolic Discounting and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 427-448, March.
    6. Jurgen Eichberger & Simon Grant & David Kelsey, 2006. "Updating Choquet Beliefs," Discussion Papers 0607, Exeter University, Department of Economics.
    7. Marie-Louise Vierø, 2012. "Contracting in Vague Environments," American Economic Journal: Microeconomics, American Economic Association, pages 104-130.
    8. Bose, Subir & Daripa, Arup, 2009. "A dynamic mechanism and surplus extraction under ambiguity," Journal of Economic Theory, Elsevier, vol. 144(5), pages 2084-2114, September.
    9. 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.
    10. Eisei Ohtaki & Hiroyuki Ozaki, "undated". "Optimality in a Stochastic OLG Model with Ambiguity," Working Papers e69, Tokyo Center for Economic Research.
    11. Laurent Denant-Boemont & Olivier L’Haridon, 2013. "La rationalité à l'épreuve de l'économie comportementale," Revue française d'économie, Presses de Sciences-Po, pages 35-89.
    12. Hackbarth, Dirk & Miao, Jianjun, 2012. "The dynamics of mergers and acquisitions in oligopolistic industries," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 585-609.
    13. Marie-Louise Vierø, 2012. "Contracting in Vague Environments," American Economic Journal: Microeconomics, American Economic Association, pages 104-130.
    14. Piero Gottardi & Jean-Marc Tallon & Paolo Ghirardato, 2015. "Flexible contracts," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01238046, HAL.
    15. 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.
    16. Martin Cincibuch & Matrina Horníková, 2008. "Measuring the Financial Markets’ Perception of EMU Enlargement: The Role of Ambiguity Aversion," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(05-06), pages 210-230, August.
    17. Scott Condie & Jayant Ganguli, 2011. "Informational efficiency with ambiguous information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 229-242.
    18. Eichberger, Jurgen & Grant, Simon & Kelsey, David, 2007. "Updating Choquet beliefs," Journal of Mathematical Economics, Elsevier, vol. 43(7-8), pages 888-899, September.

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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