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Barter and monetary exchange under private information

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  • Stephen D. Williamson
  • Randall Wright

Abstract

We analyze economies with private information concerning the quality of commodities. Without private information there is a nonmonetary equilibrium with only high quality commodities produced, and money cannot improve welfare. With private information there can be equilibria with bad quality commodities produced, and sometimes only nonmonetary equilibrium is degenerate. The use of money can lead to active (i.e., nondegenerate) equilibria when no active nonmonetary equilibrium exists. Even when active nonmonetary equilibria exist, with private information money can increase welfare via its incentive effects: in monetary equilibrium, agents may adopt trading strategies that discourage production of low quality output.

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  • Stephen D. Williamson & Randall Wright, 1991. "Barter and monetary exchange under private information," Staff Report 141, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:141
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    References listed on IDEAS

    as
    1. Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-1344, December.
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    7. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April.
    8. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    9. S. Rao Aiyagari, 1989. "Gresham's Law in a Lemons Market for Assets," Canadian Journal of Economics, Canadian Economics Association, vol. 22(3), pages 686-697, August.
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    11. Bruce Smith, 1986. "Limited Information, Money, and Competitive Equilibrium," Canadian Journal of Economics, Canadian Economics Association, vol. 19(4), pages 780-797, November.
    12. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    13. Aiyagari, S Rao & Wallace, Neil, 1992. "Fiat Money in the Kiyotaki-Wright Model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 2(4), pages 447-464, October.
    14. Williamson, Stephen D., 1992. "Laissez-faire banking and circulating media of exchange," Journal of Financial Intermediation, Elsevier, vol. 2(2), pages 134-167, June.
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    Keywords

    Money theory;

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