Inflation as Prisoner's Dilemma: The Case for Mandatory Wage-Price Controls

Abstract

Behavior toward uncertain future inflation gives rise to large diffuse externalities which result in market failure and require introduction of legal restraints -- mandatory wage—price controls. Models of wage-profit conflict and consumer vs. consumer rivalry are set out in which individual rationality leads to collective ruin (the so—called Prisoner's Dilemma). Evidence from national sample surveys indicates broad—based support for controls, and suggests some people do perceive the externalities generated by inflation.