Anonymous markets and monetary trading

Abstract

We study infinite-horizon monetary economies characterized by trading frictions that originate from random pairwise meetings, and commitment and enforcement limitations. We prove that introducing occasional trade in "centralized markets" opens the door to an informal enforcement scheme that sustains a non-monetary efficient allocation. All is required is that trading partners' be patient and their actions be observable. We then present a matching environment in which trade may occur in large markets and yet agents' trading paths cross at most once. This allows the construction of models in which infinitely-lived agents trade in competitive markets where money plays an essential role.

Experimental Evidence on the Essentiality and Neutrality of Money in a Search Model

“…3 Given a finite population of sufficiently patient agents, there exists a continuum of nonmonetary gift-exchange equilibria in addition to the monetary equilibrium; these gift-exchange equilibria are supported by a contagious grim-trigger strategy played by the society of agents as a whole (Kandori, 1992). Some of these gift-exchange equilibria Pareto dominate the monetary equilibrium implying that money may fail to be essential (e.g., Aliprantis, Camera, & Puzzello, 2007a, 2007bAraujo, 2004;Araujo, Camargo, Minetti, & Puzzello, 2012). However, Duffy and Puzzello find that subjects avoid nonmonetary gift-exchange equilibria in favor of coordinating on the monetary equilibrium.…”

“…However, Duffy and Puzzello find that subjects avoid nonmonetary gift-exchange equilibria in favor of coordinating on the monetary equilibrium. Duffy and Puzzello also study versions of the model when money is not available (see Aliprantis et al, 2007a, 2007band Araujo et al, 2012 and find that welfare is significantly higher in environments with money than without money, suggesting that money plays a key role as an efficiency enhancing coordination device. Camera and Casari (2014) also compare outcomes across two environments, with fiat money ("tickets") and without fiat money.…”

“…Notice that the environment lacks commitment and formal enforcement. However, since our population is finite, in addition to the monetary equilibrium, there exist multiple nonmonetary equilibria supported by informal enforcement schemes (see Aliprantis et al, 2007aAliprantis et al, , 2007bAraujo et al, 2012;Ellison, 1994;Kandori, 1992).…”

Stationarity without degeneracy in a model of commodity money

“…3 Cavalcanti and Erosa (2007), for instance, use linearity in a version of the Lucas's tree economy, in which the productivity of a business depends on ownership shocks, in order to predict business turnover rates. 4 Although Galenianos and Kircher (2006) sidestep questions about stationarity and optimality to some extent, their formulation of heterogeneity is similar in spirit to the one adopted here. In order to make that comparison easier for the reader, we have included a section explaining how an auctions setup in the context of our environment could help allocating resources in our model.…”

“…3 Most papers in monetary theory make however an e¤ort to restore the aggregative structure of traditional macro models, and leave potential descriptions of heterogeneity unexplored. 4 Lagos and Wright (2005) is a standard reference for a di¤erent motivation: to impose stationarity and to appeal to quasi-linearity and markets in order to eliminate the distribution of money and to evaluate in ‡ationary policies. Shi (1997) had already pursued a model of degeneracy and policy evaluation, but did so with a coordination of individuals according to 'families', making it di¢ cult to assess optimality in his model.…”