Loss avoidance in nominal frames and fairness in downward nominal wage rigidity and disinflation

Lunardelli, André (2009): Loss avoidance in nominal frames and fairness in downward nominal wage rigidity and disinflation.

Abstract

This paper proposes a more general definition of loss avoidance, relates it to fairness and applies it to the labor market. By influencing judgments about what is a fair wage readjustment, it can lead to coordination failures, generating downward nominal wage rigidity (DNWR) and disinflation costs even with common knowledge of credible policies. This suggests that policies with good frames, including inflation targeting, can mitigate the sacrifice ratio.

• Item Type: MPRA Paper
• Language: English
• Keywords: loss avoidance; fair wage effort hypothesis; nominal frame; higher order beliefs; Keynesian beauty contest; Phillips curve; inflation inertia; disinflation; downward nominal wage rigidity.
• Subjects: D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J30 - General

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