Working Paper: NBER ID: w1586
Authors: Richard C. Marston; Stephen J. Turnovsky
Abstract: This paper considers two alternative approaches to stabilizing an economy with firm-specific productivity disturbances. The first uses wage contracts tying wages in each firm to these disturbances as well as the price level. The second uses a tax on firms which modifies their supply behavior together with a simple waqe indexation rule tying wages to prices alone. Both these schemes are viable as long as the firm-specific disturbance is known to all agents. If the firm alone observes the productivity disturbance, under either scheme it has an incentive to misrepresent current conditions. However, a combination of these two schemes is both welfare maximizing and incentive compatible.
Keywords: Macroeconomics; Taxation; Wage Indexation
JEL Codes: E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage indexation (J38) | economic stability (E63) |
| taxation scheme (H20) | firms' supply behavior (D21) |
| taxation scheme (H20) | economic stability (E63) |
| wage indexation + taxation scheme (J38) | output stabilization (E63) |
| productivity disturbances (O49) | firms misrepresenting conditions (L14) |
| wage indexation (J38) | exacerbation of destabilizing effects from real disturbances (C62) |