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Money is an Experience Good: Competition and Trust in the Private Provision of Money

  • Ramon Marimon
  • Juan Pablo Nicolini
  • Pedro Teles

We study the interplay between competition and trust as efficiency enhancing mechanisms in the private provision of money. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a lower bound on efficiency. Stationary inflation must be positive and, therefore, the Friedman rule cannot be achieved. The quality of money can only be observed after its purchasing capacity is realized. In that sense money is an experience good. We show that the two problems, the time-inconsistency in the private provision of money and moral-hazard in the provision of experience goods, are isomorphic, and therefore the same results are attained in both settings.

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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200916.

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Date of creation: 2009
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Handle: RePEc:ptu:wpaper:w200916
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