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Ambiguity aversion and the absence of wage indexation

  • Jean-Marc Tallon

    ()

    (EUREQUA - Equipe Universitaire de Recherche en Economie Quantitative - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Sujoy Mukerji

    (University of Oxford (UK) - University of Oxford [Oxford])

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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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00174562.

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Date of creation: 2004
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Publication status: Published in Journal of Monetary Economics, Elsevier, 2004, pp.653-670
Handle: RePEc:hal:cesptp:halshs-00174562
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00174562
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  1. Mukerji, S. & Tallon, J.-M., 1999. "Ambiguity Aversion and Incompleteness of Financial Markets," Papiers d'Economie Mathématique et Applications 1999-28, Université Panthéon-Sorbonne (Paris 1).
  2. Jovanic, Boyan & Ueda, Masako, 1997. "Contracts and Money," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 700-708, August.
  3. Mukerji, S., 1995. "Understanding the nonadditive probability decision model," Discussion Paper Series In Economics And Econometrics 9517, Economics Division, School of Social Sciences, University of Southampton.
  4. Jean-Marc Tallon, 1998. "Asymmetric Information, Nonadditive Expected Utility, and the Information Revealed by Prices: An Example," Post-Print halshs-00502491, HAL.
  5. David Card, 1984. "An Empirical Model of Wage Indexation Provisions in Union Contracts," NBER Working Papers 1388, National Bureau of Economic Research, Inc.
  6. Mokerji, S. & Tallon, J.M., 2000. "Ambiguity Aversion and the Absence of Indexed Debt," Papiers d'Economie Mathématique et Applications 2000.53, Université Panthéon-Sorbonne (Paris 1).
  7. 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.
  8. Itzhak Gilboa & David Schmeidler, 1989. "Maxmin Expected Utility with Non-Unique Prior," Post-Print hal-00753237, HAL.
  9. Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
  10. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
  11. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
  12. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  13. 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.
  14. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  15. Fischer, Stanley, 1977. "Wage indexation and macroeconomics stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 107-147, January.
  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. 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.
  18. 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.
  19. 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.
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