Money, Search and Costly Matchmaking

Abstract

I examine the robustness of monetary equilibria in a random matching model where a more efficient mechanism for trade is available. Agents choose between two trading sectors: the search and the intermediated sector. In the former, trade partners arrive randomly and there is a trading externality. In the latter a costly matching technology provides deterministic double-coincidence matches. Multiple equilibria exist with the extent of costly matching endogenously determined. Money and “mediated” trade may coexist. This depends on the size of the probability of a trade, relative to the cost of deterministic matching. This outcome is inferior for an increasing returns externality. Under certain conditions regimes with only costly matching are welfare superior to monetary regimes with random matching.

Keywords: monetary economics, search, multiple equilibria, coordination failures

JEL Classification: C62, D83, E40