Money in Bilateral Trade

Aleksander Berentsen and Guillaume Rocheteau

Swiss Journal of Economics and Statistics (SJES), 2002, vol. 138, issue IV, 489-506

Abstract: In this paper we compare production inefficiencies in bilateral meetings generated by two types of trading frictions: double-coincidence frictions and information frictions. For both types of frictions, money enlarges the sets of incentive-feasible allocations relative to barter. In environments with double-coincidence frictions, the first-best allocation is incentive-feasible if the real stock of money is sufficiently high. In contrast, in environements with information frictions, the first-best allocation is never incentivefeasible regardless of the real stock of money. These results highlight a fundamental difference between these two types of frictions. While money can eliminate the production inefficiencies that arise in bilateral meetings with a double-coincidence problem, it can only ameliorate but not eliminate the inefficiencies that are due to private information.

Keywords: Money; double-coincidence problem; private information; search; mechanism design (search for similar items in EconPapers)
JEL-codes: D83 E00 E52 (search for similar items in EconPapers)
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ses:arsjes:2002-iv-10

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