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Efficient Online Exchange via Fiat Money

  • Jie Xu

    (Electrictal Engineering, UCLA)

  • Mihaela van der Schaar

    (Electrictal Engineering, UCLA)

  • William Zame

    (University of California, Los Angeles)

In many online systems, individuals provide services for each other; the recipient of the service obtains a benefit but the provider of the service incurs a cost. If benefit exceeds cost, provision of the service increases social welfare and should therefore be encouraged but the individuals providing the service gain no (immediate) benefit from providing the service and hence have an incentive to withhold service. Hence there is scope for designing a protocol that improves welfare by encouraging exchange. To operate successfully within the confines of the online environment, such a protocol should be distributed, robust, and consistent with individual incentives. This paper proposes and analyzes protocols that rely solely on the exchange of fiat money or tokens. The analysis has much in common with work on search models of money but the requirements of the environment also lead to many differences from previous analyses - and some surprises; in particular, existence of equilibrium becomes a thorny problem and the optimal quantity of money is different.

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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1315.

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Length: 54 pages
Date of creation: 2013
Date of revision: May 2013
Handle: RePEc:eie:wpaper:1315
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  1. Joseph M. Ostroy & Ross M. Starr, 1973. "Money and the Decentralization of Exchange," UCLA Economics Working Papers 041, UCLA Department of Economics.
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  13. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
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