Wage contingencies, the pattern of negotiation and aggregate implications of alternative contract structures

Abstract

A model of long-term contracts is developed in which the choice of the negotiation pattern is endogenized. When disturbances to the economy derive primarily from relative shocks, staggered negotiation is optimal because adjustments made by negotiating agents transmit desirable employment effects into sectors that are looked into previously negotiated contracts. The price level acts as the transmission mechanism. Indexation of wages to the price level enhances the benefits of staggered negotiation because the sector-specific information revealed by the price level acts as a substitute for explicit inclusion in the contract of sector-specific information. The degree of persistence and the level of variation in aggregate output and employment, measures which are commonly used in comparing the merits of synchronized versus staggered regimes, are shown to be inappropriate criteria upon which to judge the optimality of the negotiation pattern. © 1984.