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Ambiguity aversion and the absence of wage indexation

  • Jean-Marc Tallon

    ()

    (EUREQUA - Equipe Universitaire de Recherche en Economie Quantitative - CNRS : UMR8594 - Université Paris I - Panthéon-Sorbonne)

  • Sujoy Mukerji

    (University of Oxford (UK) - University of Oxford (UK))

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
Date of revision:
Publication status: Published, Journal of Monetary Economics, 2004, 653-670
Handle: RePEc:hal:cesptp:halshs-00174562
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00174562
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  1. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  2. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  3. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  4. Hansen, Lars Peter & Sargent, Thomas J & Tallarini, Thomas D, Jr, 1999. "Robust Permanent Income and Pricing," Review of Economic Studies, Wiley Blackwell, vol. 66(4), pages 873-907, October.
  5. 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.
  6. David Card, 1984. "An Empirical Model of Wage Indexation Provisions in Union Contracts," NBER Working Papers 1388, National Bureau of Economic Research, Inc.
  7. Sujoy Mukerji & Jean-Marc Tallon, 2000. "Ambiguity Aversion and the Absence of Indexed Debt," Economics Series Working Papers 28, University of Oxford, Department of Economics.
  8. Sujoy Mukerji, 1996. "Understanding the nonadditive probability decision model (*)," Economic Theory, Springer, vol. 9(1), pages 23-46.
  9. Sujoy Mukerji & Jean-Marc Tallon, 2000. "Ambiguity Aversion and Incompleteness of Financial Markets," Economics Series Working Papers 46, University of Oxford, Department of Economics.
  10. Jovanovic, B. & Ueda, M., 1996. "Contracts and Money," Working Papers 96-23, C.V. Starr Center for Applied Economics, New York University.
  11. 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.
  12. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
  13. Fischer, Stanley, 1977. "Wage indexation and macroeconomics stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 107-147, January.
  14. Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
  15. 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.
  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. Tallon, Jean-Marc, 1998. "Asymmetric Information, Nonadditive Expected Utility, and the Information Revealed by Prices: An Example," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 329-42, May.
  19. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
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