Asymmetry, imperfectly transferable utility, and the role of fiat money in improving terms of trade

Merwan Engineer, Shouyong Shi

Research output: Contribution to journalArticlepeer-review

12 Scopus citations

Abstract

We modify the Kiyotaki and Wright (1991, J. Economic Theory 53, 215-235; 1993, Amer. Econom. Rev. 83, 63-77) framework so that there is a universal double coincidence of wants in all barter matches. We also introduce divisible service sidepayments into the model and allow agents to bargain over bundles of goods, services and money in bilateral matches. In asymmetric matches, the agent that values the other's good more dearly will typically have to make a substantial service sidepayment to complete the bargain. When sidepayments transfer utility imperfectly, the general equilibrium is inefficient. Agents barter too much. When barter is inefficient, a robust monetary equilibrium may exist which improves welfare. Both robust monetary equilibria and welfare-improving monetary equilibria require asymmetric matches, imperfectly transferable utility, and monetary exchange yields better expected terms of trade than barter. In contrast to other search models, money does not speed up trade. (C) 1998 Elsevier Science B.V. All rights reserved.

Original languageEnglish (US)
Pages (from-to)153-183
Number of pages31
JournalJournal of Monetary Economics
Volume41
Issue number1
DOIs
StatePublished - Feb 1998

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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