INSIDE MONEY, ORGANIZED MARKETS, AND SPECIALIZATION

Yiting Li ()

Macroeconomic Dynamics, 2007, vol. 11, issue 3, 388-404

Abstract: We consider an economy in which people choose between a random-matching sector and organized markets absent double-coincidence problems. Merchants in the organized markets issue bills of exchange. Pareto-ranked multiple equilibria exist with the extent of the market and circulation of private liabilities endogenously determined. If trade frictions are moderate, bills circulate as a general medium of exchange, and the level of specialization is higher relative to barter. In this case, higher inside liquidity is accompanied by more specialization. When all transactions take place in the organized markets, trading risk vanishes and the economy achieves complete specialization.

Date: 2007
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