U NTIL very recently, the literature on the wider usage of escalator clauses has dealt mainly with their impact on inflation, unemployment, the trade balance, and the exchange rate.' It is equally important, however, to understand why, and in what circumstances, employers and labor unions agree to incorporate such clauses in work contracts. In the past few years, Shavell (1976), Azariadis (1978), and Blinder (1978) have outlined a theoretical framework for explaining the emergence of indexation. To the best of our knowledge, however, none of the assumptions deriving from these models have been subjected to empirical testing. The purpose of this paper is first to develop and test a number of these assumptions and second to consider the problem of simultaneity between two types of adjustments to inflation: indexation versus shorter contract duration. In the first section, we summarize the contributions of the three aforementioned authors to the theory of wage indexation and extract from them a number of verifiable assumptions. The second section provides an empirical framework. Since adjustments to uncertainty about inflation can take the form of shorter contract duration or indexation, those two variables are simultaneously determined. To overcome the problem of dummy endogenous variables in a simultaneous equation system, we have applied the method suggested by Heckman (1978), based on the use of maximum likelihood estimators. In the third section, we analyse the results and in the conclusion we draw their implications for economic policy.