Coin Assaying and Commodity Money

36 Pages Posted: 30 Oct 2008

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2008

Abstract

How beneficial is a fully recognizable money to the economy? This paper answers this question for the commodity money system. We build a model in which money is made of precious metal coins, yet its intrinsic quality is imperfectly recognizable by sellers. Based on historical evidence, we allow buyers to resort to a fixed cost coin certification technology - known as coin assaying - that fully reveals the quality of coins to sellers. We show that the two inefficiencies associated with imperfectly recognizable commodity money. Lower quantities traded or lower trading frequencies. are reduced thanks to this technology. We characterize pure and mixed strategy equilibria in which agents certify their coins, and show that certification coexists as a pure strategy equilibrium with the low-quantity inefficiency but does not coexist with the low-frequency inefficiency. The coin inspection technology is welfare improving when it removes the low-frequency inefficiency, but welfare deteriorating when it removes the low-quantity inefficiency.

Keywords: Commodity Money, Asymmetric Information, Coin Assaying, Search

JEL Classification: D82, E42, N23

Suggested Citation

Bignon, Vincent and Dutu, Richard, Coin Assaying and Commodity Money (April 1, 2008). Available at SSRN: https://ssrn.com/abstract=1291908 or http://dx.doi.org/10.2139/ssrn.1291908

Vincent Bignon (Contact Author)

Banque de France ( email )

DGEI 49-1430
31 rue Croix des Petits Champs
Paris, 75001
France
+33142924330 (Phone)

Richard Dutu

University of Waikato ( email )

Te Raupapa
Private Bag 3105
Hamilton, 3240
New Zealand

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