A NEW THEORY OF CORPORATISM AND WAGE SETTING

The standard view on corporatist institutions for wage setting in many European economies is based of the insider-outsider model. Corporatis m is associated with lack of wage flexibility. This paper discusses a new approach starting from the importance of nominal contracts. The ra tionale for these contracts is to avoid future bargaining. Adjusting t hese contracts ex post to aggregate shocks would raise their efficienc y. However, avoiding the bargaining required for this adjustment was t he main reason for negotiating these contracts in the first place. Thi s is the fundamental contradiction. Under corporatism, outside institu tions can play this role. These institutions provide therefore a type of flexibility not available in decentralized economies. Empirical evi dence supports the basic ideas of this model. (C) 1997 Elsevier Scienc e B.V.