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Decentralized Exchange and Factor Payments: A Multiple-Matching Approach

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Abstract

The emergence of fiat money is studied in an environment in which exchange is organized around trading posts where many producers and shoppers are matched in a dynamic monopolistically competitive framework. Each household consumes a bundle of commodities and has a preference for consumption variety. Within this multiple matching structure we determine the endogenous organization of exchange between firms and shoppers and the means of factor payment (remuneration) as well as the price at which these trades occur. Although each household contacts many sellers, the specialization of tastes implies that the variety of the consumption basket under barter mediated exchange is sparser than that obtained under monetary exchange. We verify that the endogenous linkage of factor payments with the medium of exchange can lead to a monetary equilibrium outcome where only fiat money trades for goods, an ex-ante feature of cash-in-advance models. We also examine the long-run effects of money growth on the equilibrium pattern of exchange. A primary finding, consistent with documented hyperinflationary episodes, is that a sufficiently rapid expansion of money supply and inflation leads to the gradual emergence of barter. Under these circumstances sellers will accept both goods and cash payments whereas workers receive part of their remuneration in goods.

Suggested Citation

  • Derek Laing & Victor E. Li & Ping Wang, 2009. "Decentralized Exchange and Factor Payments: A Multiple-Matching Approach," Villanova School of Business Department of Economics and Statistics Working Paper Series 6, Villanova School of Business Department of Economics and Statistics.
  • Handle: RePEc:vil:papers:6
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    File URL: http://repec.library.villanova.edu/workingpapers/VSBEcon6.pdf
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    Keywords

    Variety Preference; Search; Trading Post; Monetary vs. Barter Equilibrium;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E0 - Macroeconomics and Monetary Economics - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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