Our paper provides an explanation why cost-of-living adjustment (COLA) provisions and their characteristics vary widely across U.S. industries. We develop models of optimal risk sharing between a firm and union to investigate the determinants of a number of contract characteristics. These include the presence and degree of wage indexing, the magnitude of deferred noncontingent wage increases, contract duration, and the trade-off between temporary layoffs and wage indexing. Preliminary empirical tests of some of the implications of the model are described. One key finding is that the level of unemployment insurance benefits appears to influence the level of layoffs and the extent of COLA coverage simultaneously.
Available at: http://works.bepress.com/ronald_ehrenberg/190/