The Role of Money in Double Coincidence Environments

This paper studies the role of money in asymmetric double coincidence of real wants environments where in each meeting each agent is a consumer of the other agent's production. Traders who meet at random finance their purchases through current production, sale of divisible money, or both. It is shown that in the absence of valued money if traders have asymmetric tastes for each other's good, they produce and exchange socially inefficient quantities. With valued money, however, traders exchange efficient quantities if the asymmetry of tastes is not too large. It is also shown that terms of trades in the monetary economy are strictly better than those in the corresponding barter economy, that the Friedman rule holds, and that the allocation of resources in the monetary economy converges to the allocation in the barter economy as the growth rate of the money supply is increased.