Co-essentiality of money and credit: A mechanism-design view

Hugo van Buggenum and Stanislav Rabinovich

Journal of Economic Theory, 2023, vol. 213, issue C

Abstract: Under what conditions are money and credit jointly essential for trade? We answer this question by applying a mechanism-design approach to a standard monetary search model, augmented with two types of credit technologies. First, payment can be enforced up to some exogenous amount (enforcement-based credit). Second, default on past promises can be partially monitored by future trading partners (monitoring-based credit). We characterize implementable allocations subject to individual rationality and bilateral efficiency of trades. Consistent with prior literature, we find that money and monitoring-based credit cannot be jointly essential. However, we show that money and enforcement-based credit are jointly essential as long as neither payment instrument by itself is sufficient to implement a first-best. Money is memory, but it is not enforcement.

Keywords: Money; Credit; Search; Essentiality; Mechanism design (search for similar items in EconPapers)
JEL-codes: D82 D83 E40 E50 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:213:y:2023:i:c:s0022053123001308

DOI: 10.1016/j.jet.2023.105734

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