NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Contracts and Money

Boyan Jovanovic, Masako Ueda

NBER Working Paper No. 5637
Issued in June 1996
NBER Program(s):   PR

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.

download in pdf format
   (1295 K)

email paper

This paper is available as PDF (1295 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

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

Users who downloaded this paper also downloaded these:
Shin Comment on "The Leverage Cycle"
Mehra and Prescott w9525 The Equity Premium in Retrospect
Shleifer and Vishny w5167 The Limits of Arbitrage
Auerbach w9306 Is There a Role for Discretionary Fiscal Policy?
Caliendo and Parro w18508 Estimates of the Trade and Welfare Effects of NAFTA
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us