Endogenous buyer-seller choice and divisible money in search equilibrium

Miquel Faig

Journal of Economic Theory, 2008, vol. 141, issue 1, 184-199

Abstract: In the Lagos-Wright model [R. Lagos, R. Wright, A unified framework for monetary theory and policy analysis, J. Polit. Economy 113 (2005) 463-484], the quasi-linear preferences assumption is not necessary to generate simple distributions of money holdings if individuals choose endogenously to go to the search market as buyers or as sellers. The non-convex buyer-seller choice provides an incentive for gambling in lotteries, and, as a result, the value function has a linear interval. As long as this interval is the relevant one for evaluating their future utilities, individuals behave as if their preferences were quasi-linear. In the stationary equilibrium, individuals remain inside this linear interval if the money supply does not decline.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:141:y:2008:i:1:p:184-199

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