44 Pages Posted: 15 Feb 2014
Date Written: March 1, 2001
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: Suggested Citation