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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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Sujoy Mukerji More by this author
Jean-Marc Tallon More by this author
Volume:
111
Series:
Discussion paper series
Publication date:
2002-07-22
URN:
uuid:4b36b5fa-c9f0-412c-b024-13bb8edd7485
Local pid:
ora:1148
Language:
English

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