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Ambiguity Aversion and the Absence of Wage Indexation.

Abstract:
This paper analyzes optimal wage contracting assuming agents are not subjective expected utility maximizers but are, instead, ambiguity (or uncertainty) averse decision makers who maximize Choquet expected utility. We show that such agents will choose not to include any indexation coverage in their wage contracts even when inflation is uncertain, unless the perceived inflation uncertainty is high enough. Significantly, the exercise does not presume any exogenous costs (e.g., transactions costs) of including indexation links.

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Publisher:
Elsevier
Journal:
Journal of Monetary Economics
Volume:
51
Issue:
3
Pages:
653 - 670
Publication date:
2004-01-01
DOI:
ISSN:
0304-3932
Language:
English
UUID:
uuid:46487aa9-3a80-4c47-a537-739c5ee190c4
Local pid:
oai:economics.ouls.ox.ac.uk:14693
Deposit date:
2011-08-16

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