Stochastic Inflation and Wage Indexation

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Abstract

The choice between an indexed and an unindexed wage in a labor contract is studied in this paper. It is shown that the expected rate of inflation does not affect the attractiveness of indexation; that an increase in the uncertainty of inflation and an increase in the worker's risk aversion lead to an increase in the attractiveness of indexation; and that an increase in the cost of indexation and an increase in the perfection of the capital market lead to a decrease in the attractiveness of indexation.
Original languageEnglish
Pages (from-to)326-336
Number of pages11
JournalThe Scandinavian Journal of Economics
Volume86
Issue number3
StatePublished - 1984

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