Money is an Experience Good: Competition and Trust in the Private Provision of Money

27 Pages Posted: 8 Sep 2009

See all articles by Ramon Marimon

Ramon Marimon

European University Institute

Juan Pablo Nicolini

Universitat Pompeu Fabra

Pedro Teles

Federal Reserve Bank of Chicago; Centre for Economic Policy Research (CEPR)

Date Written: August 2009

Abstract

We study the interplay between competition and trust as efficiency-enhancing mechanims in the private provision of money. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a lower bound on efficiency. Stationary inflation must be positive and, therefore, the Friedman rule cannot be achieved. The quality of money can only be observed after its purchasing capacity is realized. In that sense money is an experience good. We show that the two problems, the time-inconsistency in the private provision of money and moral-hazard in the provision of experience goods, are isomorphic, and therefore the same results are attained in both settings.

Keywords: Currency competition, Experience goods, Inflation, Trust

JEL Classification: E40, E50, E58, E60

Suggested Citation

Marimon, Ramon and Nicolini, Juan Pablo and Teles, Pedro, Money is an Experience Good: Competition and Trust in the Private Provision of Money (August 2009). CEPR Discussion Paper No. DP7418, Available at SSRN: https://ssrn.com/abstract=1469917

Ramon Marimon

European University Institute ( email )

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Italy
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Juan Pablo Nicolini

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

Pedro Teles (Contact Author)

Federal Reserve Bank of Chicago ( email )

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Chicago, IL 60604
United States
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312-322-2357 (Fax)

Centre for Economic Policy Research (CEPR)

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United Kingdom