COMPENSATION FOR QUALITY DIFFERENCE IN A SEARCH MODEL OF MONEY

Yuk-fai Fong and Balázs Szentes

International Economic Review, 2005, vol. 46, issue 3, 957-971

Abstract: We study an economy in which there is always double coincidence of wants, agents have perfect information about qualities of goods, and there are no transaction costs. The hold-up problem arises because efforts invested in improving quality prior to search may not be compensated in the market. Situations in which barter fails to motivate quality improvement are identified. With money, however, the extra effort in quality improvement will be compensated when high-quality good producers trade with agents holding both the low-quality good and money. Injection of money can induce almost all agents to produce the high-quality good. Copyright 2005 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Date: 2005
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