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Ambiguity Aversion and the Absence of Wage Indexation

Sujoy Mukerji () and Jean-Marc Tallon ()

No 111, Economics Series Working Papers from University of Oxford, Department of Economics

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.

Keywords: wage contracts; indexation; inflation; uncertainty (search for similar items in EconPapers)
JEL-codes: D81 J31 (search for similar items in EconPapers)
Date: 2002-07-01
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Journal Article: Ambiguity aversion and the absence of wage indexation (2004) Downloads
Working Paper: Ambiguity aversion and the absence of wage indexation (2004) Downloads
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