The emergence of medieval markets has been seen in the literature as hampered by lack of contract enforcement and institutions like merchants’ communal responsibil-ity. Merchants traveling to a different marketplace could be held liable for debts in-curred by any merchant from their hometown. We argue that communal responsibility was effective in enforcing credit contracts and enabled merchants to use bills of ex-change in long distance trade even if reputation effects were absent. We implement this in the Lagos and Wright (2005) matching model of money demand, assuming that preference shocks follow a two-state Markov chain. We derive conditions under which cash and credit in the anonymous matching market coexist. For fixed but suffi-ciently low cost of credit, agents will pay with cash in low-quality matches, and use cash and credit in high-quality matches. The use of credit reduces the money holdup in the matching market and thus leads to Pareto improvements
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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number
884.
Length: Date of creation: 03 Dec 2006 Date of revision: Handle: RePEc:red:sed006:884
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Find related papers by JEL classification: N2 - Economic History - - Financial Markets and Institutions E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
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