TY  - JOUR
AU  - Jovanovic,Boyan
AU  - Ueda,Masako
TI  - Contracts and Money
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5637
PY  - 1996
Y2  - June 1996
UR  - http://www.nber.org/papers/w5637
L1  - http://www.nber.org/papers/w5637.pdf
N1  - Author contact info:
Boyan Jovanovic
New York University
Department of Economics
19 W. 4th Street, 6th Floor
New York, NY  10012
Tel: 212/998-8953
Fax: 212/995-4186
E-Mail: Boyan.Jovanovic@nyu.edu

Masako Ueda
Department of Economics & Business
University Pompeu Fabra
Ramon Trias Fargas 25-27
08005 Barcelona 6367, SPAIN
Tel: fax 3435421746;  ueda@upf.es
AB  - 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.
ER  -