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Money in Bilateral Trade

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  • Aleksander Berentsen
  • Guillaume Rocheteau

Abstract

In this paper we compare production inefficiencies in bilateral meetings generated by two types of trading frictions: double-coincidence frictions and information frictions. For both types of frictions, money enlarges the sets of incentive-feasible allocations relative to barter. In environments with double-coincidence frictions, the first-best allocation is incentive-feasible if the real stock of money is sufficiently high. In contrast, in environements with information frictions, the first-best allocation is never incentivefeasible regardless of the real stock of money. These results highlight a fundamental difference between these two types of frictions. While money can eliminate the production inefficiencies that arise in bilateral meetings with a double-coincidence problem, it can only ameliorate but not eliminate the inefficiencies that are due to private information.

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Bibliographic Info

Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 138 (2002)
Issue (Month): IV (December)
Pages: 489-506

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Handle: RePEc:ses:arsjes:2002-iv-10

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Related research

Keywords: Money; double-coincidence problem; private information; search; mechanism design;

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References

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  1. Taber, Alexander & Wallace, Neil, 1999. "A Matching Model with Bounded Holdings of Indivisible Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 961-84, November.
  2. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, . "Friedman Meets Hosios: Efficiency in Search Models of Money," IEW - Working Papers 154, Institute for Empirical Research in Economics - University of Zurich.
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Cited by:
  1. Guillaume Rocheteau, 2011. "The cost of inflation: a mechanism design approach," Working Paper 1103, Federal Reserve Bank of Cleveland.

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