Indexation Rules, Risk Aversion, and Imperfect Information
Nominal wage adjustment is modeled as resulting from bargaining between a risk neutral firm and a risk averse worker, in an environment where the rate of inflation is a random variable. Risk aversion makes for endogenous indexation arrangements, which deliver partial indexation as they exploit imperfect inflation indices; risk aversion also generates a positive correlation between indexation and inflation variance. The model suggests a distinction between complete vs incomplete inflation adjustment on the one hand, and perfect vs imperfect adjustment on the other hand.
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- Leaf Danziger, 1988. "Real Shocks, Efficient Risk Sharing, and the Duration of Labor Contracts," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 435-440.
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- Ehrenberg, Ronald G & Danziger, Leif & San, Gee, 1983. "Cost-of-Living Adjustment Clauses in Union Contracts: A Summary of Results," Journal of Labor Economics, University of Chicago Press, vol. 1(3), pages 215-245, July.
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