Indexation Rules, Risk Aversion and Imperfect Information

Corrado Benassi and Antonello Eugenio Scorcu ()

Manchester School, 2003, vol. 71, issue 3, pages 330-340

Abstract: Nominal wage adjustment is modelled as resulting from bargaining between a risk-neutral firm and a risk-averse worker, in an environment where the rate of inflation is a random variable. Risk aversion makes for endogenous indexation arrangements, which deliver partial indexation as they exploit imperfect inflation indices; moreover, risk aversion generates a positive correlation between indexation and inflation variance. The model suggests a distinction between complete versus incomplete inflation adjustment, on the one hand, and perfect versus imperfect adjustment, on the other. Copyright 2003 Blackwell Publishing Ltd and The Victoria University of Manchester.

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