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Monetizing Social Exchange

44 Pages Posted: 15 Feb 2014  

Canice Prendergast

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Lars Stole

University of Chicago - Booth School of Business

Date Written: March 1, 2001

Abstract

We address the role of monetizing trades in an environment when reciprocal trade acts as the alternative means of exchange and opportunism is possible. We illustrate that money has three roles: (i) money enable trade on contractible goods, (ii) money aids trade in non-contractible goods through the use of voluntary transfers, and (iii) money possibly induces inefficient pricing and production decisions. We show a number of cases where allowing trades to be monetized reduces welfare and also illustrate how an inefficient instantaneous means of exchange can sometimes increase trade more than pure money. Finally, analogous to the role of barter in facilitating efficient exchange, we illustrate that otherwise classically inefficient restrictions on trading may have a similar desirable effect.

Keywords: contract theory, incentives

JEL Classification: C70, D82

Suggested Citation

Prendergast, Canice and Stole, Lars, Monetizing Social Exchange (March 1, 2001). Available at SSRN: https://ssrn.com/abstract=2396093 or http://dx.doi.org/10.2139/ssrn.2396093

Canice Prendergast

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7309 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lars A. Stole (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7309 (Phone)
773-702-0458 (Fax)

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