Essays on money and middlemen under private information

Yiting Li, University of Pennsylvania

Abstract

Money and middlemen are two widely observed intermediaries of exchange. Recently, search-theoretic equilibrium models of the exchange process have been used to study their functions in facilitating trades. This dissertation, related to the search-theoretic literature, is to illustrate how qualitative uncertainty as trading frictions to affect or motivate the role of intermediaries, and how they, in turn, affect the exchange process. In Chapter 2, private information is introduced in terms of qualitative uncertainty concerning the good which would be the unique medium of exchange in the economy with complete information. It is shown that commodities that suffer from qualitative uncertainty may still be used as the medium of exchange when the private information problem is not too severe and the discount rate is in the proper range. This is so despite the fact that, in some equilibria, there is necessarily some low quality commodity money produced and in circulation. Chapter 3 considers a barter economy where private information concerning the quality of consumption goods is used to motivate the role of middlemen. Agents endogenously choose whether to become middlemen by investing in a technology of verifying quality. It is shown that there exists an equilibrium where middlemen always trade high quality goods when the private information problem is not too severe and the investment cost of quality-testing technology is not too high. When the private information problem is relatively severe, middlemen sometimes trade for low quality goods. Despite a lemons problem in this economy, middlemen may or may not improve welfare, depending on whether the efficiency in facilitating trades can compensate the loss in production. A version of the model with fiat money is considered in Chapter 4 to address the interaction between money and middlemen. It finds that a generally recognizable fiat money can improve welfare in the economy even when there are expert middlemen to mitigate the private information problem. The use of money can increase welfare by promoting useful exchange as well as economizing on the information cost through reducing the number of middlemen.

Subject Area

Economics|Economic theory

Recommended Citation

Li, Yiting, "Essays on money and middlemen under private information" (1995). Dissertations available from ProQuest. AAI9543110.
https://repository.upenn.edu/dissertations/AAI9543110

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