Money and Loans
The conditions under which money is essential to support a Pareto optimum, those where loan mechanisms suffice, and those such that both are essential is examined. In the absence of a coincidence of wants, loans and/or money are necessary to facilitate exchange. In a large economy with a limited communication technology, the expected consequences to reneging are insufficient for the repayment of the utility maximizing level of loans to be time consistent. In contrast, redeemability of money is not associated with a particular agent so money has no time consistency problems. Consequently, in large economies money is essential. If, additionally, individual Clower constraints bind, loans and money are both essential.
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|Date of creation:||1985|
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