Price level uniformity in a random matching model with perfectly patient traders
This paper shows that one of the defining features of Walrasian equilibrium---law of one price---characterizes equilibrium in a non-Walrasian environment of (1) random trade matching without double coincidence of wants, and (2) strategic, price-setting conduct. Money is modeled as perfectly divisible and there is no constraint on agents' money inventories. In such an environment with discounting, the endogenous heterogeneity of money balances among agents implies differences in marginal valuation of money between distinct pairs of traders, which raises the question whether decentralized trade would typically involve price dispersion. We investigate the limiting case in which agents are patient, in the sense that they have overtaking-criterion preferences over random expected-utility streams. We show that in this case the ``law of one price'' holds exactly. That is, in a stationary Markov monetary equilibrium, all transactions endogenously must occur at a single price despite the decentralized organization of exchange. The result is in the same spirit as the work of Gale (1986a, b) on bargaining and competition, although the model differs from Gale's in some significant respects.
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- Kazuya Kamiya & Takashi Sato, 2004. "Equilibrium Price Dispersion in a Matching Model with Divisible Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 413-430, 05.
- Kamiya, K. & Sato, T., 2002. "Equilibrium Price Dispersion in a Matching Model with Divisible Money," Discussion Paper 2002-118, Tilburg University, Center for Economic Research.
- Edward J. Green & Ruilin Zhou, 2002. "Dynamic Monetary Equilibrium in a Random Matching Economy," Econometrica, Econometric Society, vol. 70(3), pages 929-969, May.
- Edward J. Green & Ruilin Zhou, 2000. "Dynamic monetary equilibrium in a random-matching economy," Working Paper Series WP-00-1, Federal Reserve Bank of Chicago.
- Gale, Douglas M, 1986. "Bargaining and Competition Part II: Existence," Econometrica, Econometric Society, vol. 54(4), pages 807-818, July. Full references (including those not matched with items on IDEAS)
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