Is Equilibrium Indexation Efficient?

Laurence Ball

The Quarterly Journal of Economics, 1988, vol. 103, issue 2, 299-311

Abstract: This paper investigates the welfare properties of equilibrium indexation in a decentralized economy. If indexation is costless, so all firms index, then the equilibrium degree of indexation is efficient. But if indexation is costly and this leads some firms not to index, equilibrium indexation is inefficient because indexation has externalities for nonindexed firms. Firms choose too little indexation if labor demand is more responsive to movements in real money than to movements in real wages. The results do not depend on the relative importance of real and nominal shocks.

Date: 1988
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