Equilibrium and Media of Exchange in a Convex Trading Post Economy with Transaction Costs

Ross M. Starr

University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego

Abstract: General equilibrium is investigated with N commodities traded at N(N-1)/2 commodity-pairwise trading posts. Trade is a resource-using activity undertaken by firms recovering transaction costs through the spread between bid (wholesale) and ask (retail) prices (quoted as commodity rates of exchange). Budget constraints are enforced at each trading post separately so that there is demand for a carrier of value between trading posts, commidty money. Existence of generaly equilibrium is established under conventional convexity and continuity conditions and technical assumptions assuring boundedness of price ratios. Trade in media of exchange (commodity money) is the difference between household gross and net trades.

Keywords: transaction costs; media of exchange; Arrow-Debreu general equilibrium; bid price; ask price (search for similar items in EconPapers)
Date: 2006-06-01
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