AbstractThis paper offers a novel positive theory of counterfeit money, in which the counterfeiters compete against both law enforcement and innocent individuals forced to verify their currency. Law enforcement efforts against counterfeiting can crowd out verification, and thus have perverse consequences, ignoring the market response. Verifiers play a supermodular "hot potato" game passing the potentially counterfeit currency, and each hurts the other by his verifying activity. Our theory simultaneously explains three key stylized facts of counterfeiting: For one, the seized to passed ratio increases in the denomination. Second, the vast majority of counterfeit money used to be seized before circulation, while now the reverse holds. Third, the $10, $20, and $100 denomination notes are counterfeited most often, and $5 and $50 the least
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 462.
Date of creation: 03 Dec 2006
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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counterfeit money; supermodular game; matching; passed; seized;
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- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
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