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On the Friedman Rule in Search Models with Divisible Money

  • Aleksander Berentsen
  • Guillaume Rocheteau

This paper studies the validity of the Friedman rule in a search model with divisible money and divisible goods where the terms of trades are determined endogenously. We show that ex post bargaining generates a holdup problem similar to the one emphasized in the labour-market literature. Buyers cannot obtain the full return that an additional unit of money provides to the match, which makes the purchasing power of money inefficiently low in equilibrium. Consequently, even though the Friedman rule maximizes the purchasing power of money, it fails to generate the first-best allocation of resources unless buyers have all the bargaining power.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 155.

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Handle: RePEc:zur:iewwpx:155
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  1. Stutzer, Alois & Frey, Bruno S., 2005. "Does Marriage Make People Happy, Or Do Happy People Get Married?," IZA Discussion Papers 1811, Institute for the Study of Labor (IZA).
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  11. Fehr, Ernst & Fischbacher, Urs & von Rosenbladt, Bernhard & Schupp, Jürgen & Wagner, Gert G., 2003. "A Nation-Wide Laboratory: Examining Trust and Trustworthiness by Integrating Behavioral Experiments into Representative Surveys," IZA Discussion Papers 715, Institute for the Study of Labor (IZA).
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  16. Frey, Bruno S. & Meier, Stephan, 2006. "The Economics of Museums," Handbook of the Economics of Art and Culture, Elsevier.
  17. Alois Stutzer, . "The Role of Income Aspirations in Individual Happiness," IEW - Working Papers 124, Institute for Empirical Research in Economics - University of Zurich.
  18. Bruno S. Frey & Alois Stutzer, . "Testing Theories of Happiness," IEW - Working Papers 147, Institute for Empirical Research in Economics - University of Zurich.
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