The Optimal Indexation of Asymmetric Information Contracts.

The indexation of labor contracts is examined in a setting from which the hedging motive for partial indexation has been excl uded. Since firms have better information than workers, contracts mus t satisfy an incentive compatibility constraint. The optimal degree o f indexation depends on the incentives generated by the best fully-in dexed contract. If firms would understate (overstate) the productivit y of labor under this contract, the optimal contract is partially (mo re-than-fully) indexed.