Systematic Risk and the Theory of Wage Indexation
In this article, the author integrates the theory of optimal wage indexation with capital market theory. The optimal indexation factor in his model depends on workers' preferences, firm-specific variables, and economywide capital market variables. A major difference between the results of the model and those of the previous literature is that, in his model, nonsymmetric randomness does not affect the indexation decision. In addition, the effects of economywide capital market variables can provide an explanation for why the author does not observe wage contracts with more than perfect indexation, contracts where real wages rise with unexpected inflation. Copyright 1990 by the University of Chicago.