Explaining economic fluctuations by the existence of imperfect wage rules begs the question of why such rules are chosen in labor contracts. The form of wage rules is not exogenous but determined by cost and efficiency considerations. Fully contingent rules preserve efficiency but are costly to write and enforce. Noncontingent rules may lead to large inefficiencies. Actual rules, which index the wage only to the price level, may be the optimal compromise. This paper characterizes the equilibrium of an economy in which the form of wage rules is endogenous. It shows the effects of the distributions of exogenous shocks on the equilibrium distribution of output and the form of the rule. It then studies the role of policy in such an economy.