Indexation Rules, Risk Aversion and Imperfect Information

Corrado Benassi and Antonello Scorcu

Manchester School, 2003, vol. 71, issue 3, 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.

Date: 2003
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https://doi.org/10.1111/1467-9957.00349

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Working Paper: Indexation Rules, Risk Aversion, and Imperfect Information (2002)
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