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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. Amir, Rabah & Evstigneev, Igor V. & Hens, Thorsten & Schenk-Hoppe, Klaus Reiner, 2005. "Market selection and survival of investment strategies," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 105-122, February.
  2. 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," Discussion Papers 2003/1, Technische Universität Berlin, School of Economics and Management.
  3. Lars P. Feld & Bruno S. Frey, 2000. "Trust Breeds Trust: How Taxpayers are Treated," CESifo Working Paper Series 322, CESifo Group Munich.
  4. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May.
  5. Foellmi, Reto & Zweimuller, Josef, 2004. "Inequality, market power, and product diversity," Economics Letters, Elsevier, vol. 82(1), pages 139-145, January.
  6. Foellmi, Reto & Oechslin, Manuel, 2007. "Who gains from non-collusive corruption?," Journal of Development Economics, Elsevier, vol. 82(1), pages 95-119, January.
  7. Ernst Fehr & John A. List, 2004. "THE HIDDEN COSTS AND RETURNS OF INCENTIVES — TRUST AND TRUSTWORTHINESS AMONG CEOs," Labor and Demography 0409012, EconWPA.
  8. repec:zur:iewwpx:090 is not listed on IDEAS
  9. Bruno Frey & Stephan Meier, 2005. "Selfish and Indoctrinated Economists?," European Journal of Law and Economics, Springer, vol. 19(2), pages 165-171, April.
  10. Bruno S. Frey & Stephan Meier, . "Pro-Social Behavior, Reciprocity or Both?," IEW - Working Papers 107, Institute for Empirical Research in Economics - University of Zurich.
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  13. Lalive, Rafael & van Ours, Jan C & Zweimüller, Josef, 2002. "The Effect of Benefit Sanctions on the Duration of Unemployment," CEPR Discussion Papers 3311, C.E.P.R. Discussion Papers.
  14. repec:zur:iewwpx:149 is not listed on IDEAS
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  16. Bruno S. Frey & Alois Stutzer, . "Testing Theories of Happiness," IEW - Working Papers 147, Institute for Empirical Research in Economics - University of Zurich.
  17. Alois Stutzer & Bruno S. Frey, 2008. "Stress that Doesn't Pay: The Commuting Paradox," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(2), pages 339-366, 06.
  18. Stutzer, Alois & Frey, Bruno S., 2006. "Does marriage make people happy, or do happy people get married?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 35(2), pages 326-347, April.
  19. Fischbacher, Urs & Fong, Christina M. & Fehr, Ernst, 2009. "Fairness, errors and the power of competition," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 527-545, October.
  20. repec:zur:iewwpx:148 is not listed on IDEAS
  21. Frey, Bruno S. & Meier, Stephan, 2006. "The Economics of Museums," Handbook of the Economics of Art and Culture, Elsevier.
  22. Stephen Meier & Bruno Frey, 2004. "Do Business Students Make Good Citizens?," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 11(2), pages 141-163.
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