Money, Intermediaries and Cash-in-Advance Constraints
I study a search economy in which intermediaries are the driving force co-ordinating the economy on the use of a unique, common medium of exchange for transactions. If search frictions delay trade, intermediaries offering immediate exchange opportunities can make arbitrage gains from a price spread. As these intermediaries take over transactions, they are confronted to the double coincidence problem of the search market. In the model presented here, intermediaries solve this problem best by imposing a common medium of exchange to other agents, such that a Cash-in-Advance constraint results: Agents trade twice in order to consume, once to exchange their production against the medium of exchange, and once to receive their consumption good. To select between multiple equilibria, I introduce a criterion of minimal coalition proofness, whereby arbitrarily small coalitions may induce a change from one equilibrium to another. I show that any minimally coalition-proof equilibrium is Pareto-efficient, and characterize the full set of minimally coalition-proof equilibria of this economy.
|Date of creation:||01 Aug 2000|
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- Peter Howitt, 2005. "Beyond Search: Fiat Money In Organized Exchange," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 405-429, 05.
- S. Rao Aiyagari & Neil Wallace, 1991.
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428, Federal Reserve Bank of Minneapolis.
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- Gehrig, Thomas, 1993.
"Intermediation in Search Markets,"
Journal of Economics & Management Strategy,
Wiley Blackwell, vol. 2(1), pages 97-120, Spring.
- Hellwig, Martin F., 1993. "The challenge of monetary theory," European Economic Review, Elsevier, vol. 37(2-3), pages 215-242, April.
- Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
- Howitt, Peter & Clower, Robert, 2000. "The emergence of economic organization," Journal of Economic Behavior & Organization, Elsevier, vol. 41(1), pages 55-84, January.
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