Contracts and Money

Boyan Jovanovic () and Masako Ueda

No 5637, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze the contractual relation between workers and their employers when there is nominal risk. The key feature of the problem is that the consumption deflator is random and observed sometime after the effort is exerted. The worker's effort is not observable, and to induce the agent to work, second-best contracts do not insure the worker fully. They do eliminate all nominal risk for the parties (by fully indexing the terms of the contracts to the price level) but they would be re-negotiated. Foreseeing this, the parties to the contract will write one that is renegotiation-proof. Under such a contract, nominal shocks affect real consumption. Since the argument should apply in many situations, it will have macroeconomic implications, one of which is short-run non-neutrality of money. We have found that surprise money is likely to redistribute consumption and welfare towards workers, and away from shareholders.

JEL-codes: E4 (search for similar items in EconPapers)
Date: 1996-06
Note: PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published as Journal of Political Economy (August1997): pp.700-709.

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Working Paper: Contracts and Money (1996)
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