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Barter and Monetary Exchange Under Private Information

  • Williamson, S.
  • Wright, R.

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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Paper provided by University of Western Ontario, The Centre for the Study of International Economic Relations in its series University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers with number 9107.

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Length: 33 pages
Date of creation: 1991
Date of revision:
Handle: RePEc:uwo:wocier:9107
Contact details of provider: Postal: The Centre for the Study of International Economic Relations, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
Web page: http://economics.uwo.ca/

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  1. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
  2. Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-44, December.
  3. Diamond, Peter A, 1984. "Money in Search Equilibrium," Econometrica, Econometric Society, vol. 52(1), pages 1-20, January.
  4. Harald Uhlig, 1996. "A law of large numbers for large economies (*)," Economic Theory, Springer, vol. 8(1), pages 41-50.
  5. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  6. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  7. Bruce Smith, 1986. "Limited Information, Money, and Competitive Equilibrium," Canadian Journal of Economics, Canadian Economics Association, vol. 19(4), pages 780-97, November.
  8. King, Robert G. & Plosser, Charles I., 1986. "Money as the mechanism of exchange," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 93-115, January.
  9. 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.
  10. Kiyotaki, N. & Wright, R., 1990. "Search For A Theory Of Money," Working papers 90-15, Wisconsin Madison - Social Systems.
  11. Aiyagari, S Rao & Wallace, Neil, 1992. "Fiat Money in the Kiyotaki-Wright Model," Economic Theory, Springer, vol. 2(4), pages 447-64, October.
  12. Alchian, Armen A, 1977. "Why Money?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 133-40, February.
  13. Williamson, Stephen D., 1992. "Laissez-faire banking and circulating media of exchange," Journal of Financial Intermediation, Elsevier, vol. 2(2), pages 134-167, June.
  14. S. Rao Aiyagari, 1989. "Gresham's Law in a Lemons Market for Assets," Canadian Journal of Economics, Canadian Economics Association, vol. 22(3), pages 686-97, August.
  15. Freeman, Scott, 1985. "Transactions Costs and the Optimal Quantity of Money," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 146-57, February.
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