We are grateful to John Leahy, Ching-to Albert Ma, Robert W. Rosenthal, three anonymous referees, and especially Randall Wright for their helpful comments. Please address correspondence to: Balázs Szentes, Department of Economics, The University of Chicago, 1126 East 59th Street, Chicago, IL 60637, U.S.A. Phone: (773) 702-9127. Fax: (773) 702-8490. E-mail: szentes@uchicago.edu.
1468-2354/asset/IERE_centre.gif?v=1&s=0c315c019499e503c6ee8beebeaf22509be89282)
COMPENSATION FOR QUALITY DIFFERENCE IN A SEARCH MODEL OF MONEY†
Article first published online: 5 JUL 2005
DOI: 10.1111/j.1468-2354.2005.00353.x
Additional Information
How to Cite
Fong, Y.-f. and Szentes, B. (2005), COMPENSATION FOR QUALITY DIFFERENCE IN A SEARCH MODEL OF MONEY. International Economic Review, 46: 957–971. doi: 10.1111/j.1468-2354.2005.00353.x
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Manuscript received July 2002; revised November 2004.
Publication History
- Issue published online: 5 JUL 2005
- Article first published online: 5 JUL 2005
- Abstract
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We study an economy in which there is always double coincidence of wants, agents have perfect information about qualities of goods, and there are no transaction costs. The hold-up problem arises because efforts invested in improving quality prior to search may not be compensated in the market. Situations in which barter fails to motivate quality improvement are identified. With money, however, the extra effort in quality improvement will be compensated when high-quality good producers trade with agents holding both the low-quality good and money. Injection of money can induce almost all agents to produce the high-quality good.