Money and Information

Aleksander Berentsen and Guillaume Rocheteau

No 99, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: This paper investigates the role of fiat money in decentralized markets, where producers have private information about the quality of the goods they supply. Money is divisible, terms of trade are determined endogenously, and agents can finance their consumption with money or with real production. When the fraction of high quality producers in the economy is given, money promotes the production of high-quality goods, which improves the quality mix and welfare unambiguously. When this fraction is endogenous, however, we find that money can be valued even though it decreases welfare relative to the barter equilibrium. The origin of this ine .ciency is that money provides consumption insurance to low-quality producers, which can result in a higher fraction of low-quality producers in the monetary equilibrium. Finally, we find that most often agents acquire more information in the monetary equilibrium. Consequently, money is welfare-enhancing because it promotes useful production and exchange, but not because it saves information costs.

Keywords: Money; search; adverse selection; moral hazard (search for similar items in EconPapers)
JEL-codes: D83 E00 E52 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Journal Article: Money and Information (2004)
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