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Search, Bargaining, Money, and Prices under Private Information

Alberto Trejos

International Economic Review, 1999, vol. 40, issue 3, 679-95

Abstract: This paper presents a model of money and search where bargaining determines prices and the quality of goods is private information. It studies how a lemons problem affects the purchasing power of money. There are multiple, Pareto-ranked equilibria. The superior equilibrium, where no lemons are produced, exists even if information about quality is relatively scarce. In other equilibria, there is price dispersion, and uninformed buyers pay higher prices than informed buyers for all goods. Taxing money balances (a proxy for inflation) makes buyers less selective, thus reducing the average quality of supply and the premium paid for known quality. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1999
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Handle: RePEc:ier:iecrev:v:40:y:1999:i:3:p:679-95