Counterfeit $$$

Elena Quercioli and Lones Smith

No 462, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: This paper offers a novel positive theory of counterfeit money, in which the counterfeiters compete against both law enforcement and innocent individuals forced to verify their currency. Law enforcement efforts against counterfeiting can crowd out verification, and thus have perverse consequences, ignoring the market response. Verifiers play a supermodular "hot potato" game passing the potentially counterfeit currency, and each hurts the other by his verifying activity. Our theory simultaneously explains three key stylized facts of counterfeiting: For one, the seized to passed ratio increases in the denomination. Second, the vast majority of counterfeit money used to be seized before circulation, while now the reverse holds. Third, the $10, $20, and $100 denomination notes are counterfeited most often, and $5 and $50 the least

Keywords: counterfeit money; supermodular game; matching; passed; seized (search for similar items in EconPapers)
JEL-codes: E42 (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:462

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