Coen N. Teulings
Abstract
Wage setting in most European countries is governed by corporatist institutions. This paper discusses their role on the basis of several micro economic models of the role of nominal contracts. In these models, players find it beneficial to fix future wages a priori to avoid the inefficiencies of bargaining at later dates. However, it is desirable to be able to adjust these contracts to aggregate shocks. When players conduct these renegotiations themselves, this nullifies the advantages of having the contract in the first place. Delegating this task to corporatist organizations offers an alternative which preserves the advantages of contracts. The role of social norms is discussed. The model suggests that there are two institutional equilibria.