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Ambiguity aversion and the absence of wage indexation

  • Mukerji, Sujoy
  • Tallon, Jean-Marc

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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 51 (2004)
Issue (Month): 3 (April)
Pages: 653-670

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Handle: RePEc:eee:moneco:v:51:y:2004:i:3:p:653-670
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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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. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May.
  3. Mukerji, S. & Tallon, J.-M., 2000. "Ambiguity Aversion and the Absence of Indexed Debt," Economics Series Working Papers 9928, University of Oxford, Department of Economics.
  4. 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.
  5. Lars Peter Hansen & Thomas J. Sargent & Thomas D. Tallarini Jr., 1997. "Robust Permanent Income and Pricing," Levine's Working Paper Archive 596, David K. Levine.
  6. Sujoy Mukerji & Jean-Marc Tallon, 2000. "Ambiguity Aversion and Incompleteness of Financial Markets," Economics Series Working Papers 46, University of Oxford, Department of Economics.
  7. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
  8. Fischer, Stanley, 1977. "Wage indexation and macroeconomics stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 107-147, January.
  9. repec:oup:restud:v:66:y:1999:i:4:p:873-907 is not listed on IDEAS
  10. Sujoy Mukerji, 1996. "Understanding the nonadditive probability decision model (*)," Economic Theory, Springer, vol. 9(1), pages 23-46.
  11. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
  12. Jean-Marc Tallon, 1998. "Asymmetric Information, Nonadditive Expected Utility, and the Information Revealed by Prices: An Example," Post-Print halshs-00502491, HAL.
  13. Jovanovic, B. & Ueda, M., 1996. "Contracts and Money," Working Papers 96-23, C.V. Starr Center for Applied Economics, New York University.
  14. 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.
  15. Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
  16. Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-31, December.
  17. Holland, A Steven, 1995. "Inflation and Wage Indexation in the Postwar United States," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 172-76, February.
  18. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  19. Itzhak Gilboa & David Schmeidler, 1989. "Maxmin Expected Utility with Non-Unique Prior," Post-Print hal-00753237, HAL.
  20. repec:oup:restud:v:68:y:2001:i:4:p:883-904 is not listed on IDEAS
  21. 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.
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