Money and Information

Zurich IEER Working Paper No. 99

55 Pages Posted: 6 Feb 2002

See all articles by Aleksander Berentsen

Aleksander Berentsen

University of Basel - Faculty of Business and Economics; CESifo (Center for Economic Studies and Ifo Institute)

Guillaume Rocheteau

Federal Reserve Bank of Cleveland; National University of Singapore (NUS)

Date Written: January 2002

Abstract

This paper investigates the role of fiat money in decentralized markets, where producers have private information about the quality of the goods they supply. Money is divisible, terms of trade are determined endogenously, and agents can finance their consumption with money or with real production. When the fraction of high quality producers in the economy is given, money promotes the production of high-quality goods, which improves the quality mix and welfare unambiguously. When this fraction is endogenous, however, we find that money can be valued even though it decreases welfare relative to the barter equilibrium. The origin of this inefficiency is that money provides consumption insurance to low-quality producers, which can result in a higher fraction of low-quality producers in the monetary equilibrium. Finally, we find that most often agents acquire more information in the monetary equilibrium. Consequently, money is welfare-enhancing because it promotes useful production and exchange, but not because it saves information costs.

Keywords: money, search, adverse selection, moral hazard

JEL Classification: E00, D83, E52

Suggested Citation

Berentsen, Aleksander and Rocheteau, Guillaume, Money and Information (January 2002). Zurich IEER Working Paper No. 99, Available at SSRN: https://ssrn.com/abstract=299500 or http://dx.doi.org/10.2139/ssrn.299500

Aleksander Berentsen (Contact Author)

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Guillaume Rocheteau

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore