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On the Efficiency of Monetary Exchange:How Divisibility of Money Matters

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Author Info
Aleksander Berentsen
Guillaume Rocheteau

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Abstract

We use alternative assumptions about the divisibility of goods and money and the ability of agents to use lotteries on money to investigate to what extent the indivisibility of money is the cause for the typically inefficient production and consumption decisions in search-theoretic models of money. Our framework potentially generates three types of inefficiencies: the no-trade inefficiency, where no trade takes place even though it would be socially efficient to trade; and the too-much-trade and too-little-trade inefficiencies, where the quantities produced and exchanged are either larger or smaller than what the solution to a social planner’s problem would mandate. It is shown that while the no-trade and the too-much-trade inefficiencies are caused by the indivisibility of money, the too-little-trade ine .ciency remains even when money is divisible unless it is sufficiently valued.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp101.

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Handle: RePEc:zur:iewwpx:101

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Related research
Keywords: Money; Indivisibility; Search;

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Find related papers by JEL classification:
E00 - Macroeconomics and Monetary Economics - - General - - - General
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

References listed on IDEAS
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  1. Falk, Armin & Fehr, Ernst & Fischbacher, Urs, 2008. "Testing theories of fairness--Intentions matter," Games and Economic Behavior, Elsevier, vol. 62(1), pages 287-303, January. [Downloadable!] (restricted)
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  2. Bruno Frey & Alois Stutzer, 2001. "What Can Economists Learn from Happiness Research?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  3. Ralf Becker & Urs Fischbacher & Thorsten Hens, . "Soft Landing of a Stock Market Bubble, An Experimental Study," IEW - Working Papers iewwp090, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  4. Fischbacher, Urs & Thöni, Christian, 2008. "Excess entry in an experimental winner-take-all market," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 150-163, July. [Downloadable!] (restricted)
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  5. Simon Gächter & Armin Falk, . "Work motivation, institutions, and performance," IEW - Working Papers iewwp062, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  6. Armin Falk & Ernst Fehr & Urs Fischbacher, . "Driving Forces of Informal Sanctions," IEW - Working Papers iewwp059, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  7. Fehr, Ernst & Klein, Alexander & Schmidt, Klaus M., 2001. "Fairness, Incentives and Contractual Incompleteness," CEPR Discussion Papers 2790, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Rabah Amir & Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, . "Market Selection and Survival of Investment Strategies," IEW - Working Papers iewwp091, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  9. Lars P. Feld & Bruno S. Frey, 2002. "Trust breeds trust: How taxpayers are treated," Economics of Governance, Springer, vol. 3(2), pages 87-99, 07. [Downloadable!] (restricted)
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  10. Bruno S. Frey & Reiner Eichenberger, . "A Proposal for a Flexible Europe," IEW - Working Papers iewwp056, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  11. Bruno Frey, 2001. "Flexible Citizenship for a Global Society," Berkeley Olin Program in Law & Economics, Working Paper Series 1018, Berkeley Olin Program in Law & Economics. [Downloadable!]
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  12. Armin Falk & Ernst Fehr & Urs Fischbacher, . "Appropriating the Commons - A Theoretical Explanation," IEW - Working Papers iewwp055, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  13. Leonard J. Mirman & Klaus Reiner Schenk-HoppÈ, 2003. "Financial Markets and Stochastic Growth," Review of International Economics, Blackwell Publishing, vol. 11(2), pages 219-236, 05. [Downloadable!] (restricted)
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  14. Bruno S. Frey & Stephan Meier, . "Political Economists are Neither Selfish nor Indoctrinated," IEW - Working Papers iewwp069, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  15. Reiner Eichenberger & Bruno S. Frey, . "Europe's Eminent Economists: A Quantitative Analysis," IEW - Working Papers iewwp057, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  16. Peter A.G. VanBergeijk & Jan Marc Berk, . "The Lucas Critique in Practice: An Empirical Investigation of the Impact of European Monetary Integration on the Term Structure," IEW - Working Papers iewwp082, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  17. Albrecht Ritschl & Ulrich Woitek, . "Did Monetary Forces Cause the Great Depression? A Bayesian VAR Analysis for the U.S. Economy," IEW - Working Papers iewwp050, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  18. Bruno Frey & Alois Stutzer, 2001. "Beyond Bentham -- Measuring Procedural Utility," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  19. Iris Bohnet & Bruno S. Frey & Steffen Huck, . "More Order with Less Law: On Contract Enforcement, Trust, and Crowding," IEW - Working Papers iewwp052, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Aleksander Berentsen & Guillaume Rocheteau, 2004. "Money and Information," Review of Economic Studies, Blackwell Publishing, vol. 71(4), pages 915-944, October. [Downloadable!] (restricted)
    Other versions:
  2. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  3. Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output, and welfare," Working Paper 0407, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  4. Ed Nosal & Guillaume Rocheteau, 2006. "The economics of payments," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Feb. [Downloadable!]
  5. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, 2002. "Friedman Meets Hosios: Efficiency in Search Models of Money," Working Papers shouyong-02-04, University of Toronto, Department of Economics. [Downloadable!]
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  6. Brian Peterson & Shouyong Shi, 2006. "Money, Price Dispersion and Welfare," Working Papers tecipa-191, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  7. Vincent Bignon, 2009. "Cigarette Money and Black Market Prices around the 1948 German Miracle," EconomiX Working Papers 2009-2, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
  8. Aleksander Berentsen & Guillaume Rocheteau, 2002. "Money in Bilateral Trade," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 489-506, December. [Downloadable!]
  9. Richard Dutu & Ed Nosal & Guillaume Rocheteau, 2005. "On the recognizability of money," Working Paper 0512, Federal Reserve Bank of Cleveland. [Downloadable!]
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This page was last updated on 2009-12-3.

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