Nominal Wage Rigidity as a Nash Equilibrium
Models of the microfoundations of nominal price rigidities show that in the absence of real rigidities, individual firms have strong incentives to adjust prices even if other firms do not: price rigidity is not a Nash equilibrium unless the fixed cost of adjusting prices is implausibly high. This paper shows that nominal wage rigidity can be supported as a Nash equilibrium with relatively small adjustment costs and without real rigidities. The size of the necessary adjustment costs decreases labor supply elasticity increases, but is quite small for empirically plausible values of the latter. The minimum adjustment cost is relatively insensitive to the degree of substitutability between types of labor in production.
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