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Endogenous buyer-seller choice and divisible money in search equilibrium

  • Faig, Miquel

In the Lagos-Wright model [R. Lagos, R. Wright, A unified framework for monetary theory and policy analysis, J. Polit. Economy 113 (2005) 463-484], the quasi-linear preferences assumption is not necessary to generate simple distributions of money holdings if individuals choose endogenously to go to the search market as buyers or as sellers. The non-convex buyer-seller choice provides an incentive for gambling in lotteries, and, as a result, the value function has a linear interval. As long as this interval is the relevant one for evaluating their future utilities, individuals behave as if their preferences were quasi-linear. In the stationary equilibrium, individuals remain inside this linear interval if the money supply does not decline.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 141 (2008)
Issue (Month): 1 (July)
Pages: 184-199

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Handle: RePEc:eee:jetheo:v:141:y:2008:i:1:p:184-199
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