Nominal Wage Rigidity as a Nash Equilibrium

I would like to thank the FCAR and the SSHRC for generous financial support, and André Kurmann, Louis Phaneuf, and seminar participants at the Université du Québec à Montréal for helpful discussions. The usual caveats apply. Abstract : Models of the microfoundations of nominal price rigidities show that in the absence of real rigidities, individual firms have strong incentives to adjust prices even if other firms do not: price rigidity is not a Nash equilibrium unless the fixed cost of adjusting prices is implausibly high. This paper shows that nominal wage rigidity can be supported as a Nash equilibrium with relatively small adjustment costs and without real rigidities. The size of the necessary adjustment costs decreases labor supply elasticity increases, but is quite small for empirically plausible values of the latter. The minimum adjustment cost is relatively insensitive to the degree of substitutability between types of labor in production.