Abstract
The standard view on corporatist institutions for wage setting in many European economies is based of the insider-outsider model. Corporatism is associated with lack of wage flexibility. This paper discusses a new approach starting from the importance of nominal contracts. The rationale for these contracts is to avoid future bargaining. Adjusting these contracts ex post to aggregate shocks would raise their efficiency. However, avoiding the bargaining required for this adjustment was the main reason for negotiating these contracts in the first place. This is the fundamental contradiction. Under corporatism, outside institutions can play this role. These institutions provide therefore a type of flexibility not available in decentralized economies. Empirical evidence supports the basic ideas of this model.
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