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Money in Bilateral Trade

  • Aleksander Berentsen
  • Guillaume Rocheteau

In this paper we compare production inefficiencies in bilateral meetings generated by two types of trading frictions: double-coincidence frictions and information frictions. For both types of frictions, money enlarges the sets of incentive-feasible allocations relative to barter. In environments with double-coincidence frictions, the first-best allocation is incentive-feasible if the real stock of money is sufficiently high. In contrast, in environements with information frictions, the first-best allocation is never incentivefeasible regardless of the real stock of money. These results highlight a fundamental difference between these two types of frictions. While money can eliminate the production inefficiencies that arise in bilateral meetings with a double-coincidence problem, it can only ameliorate but not eliminate the inefficiencies that are due to private information.

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Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 138 (2002)
Issue (Month): IV (December)
Pages: 489-506

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Handle: RePEc:ses:arsjes:2002-iv-10
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