Co-essentiality of money and credit: A mechanism-design view

Under what conditions are money and credit jointly essential for trade? We answer this question by applying a mechanism-design approach to a standard monetary search model, augmented with two types of credit technologies. First, payment can be enforced up to some exogenous amount (enforcement-based...

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Bibliographic Details
Published inJournal of economic theory Vol. 213; p. 105734
Main Authors van Buggenum, Hugo, Rabinovich, Stanislav
Format Journal Article
LanguageEnglish
Published Elsevier Inc 01.10.2023
Subjects
Credit
Essentiality
Mechanism design
Money
Search
E40
E50
Money
Credit
Essentiality
Mechanism design
Search
D83
D82
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Summary:Under what conditions are money and credit jointly essential for trade? We answer this question by applying a mechanism-design approach to a standard monetary search model, augmented with two types of credit technologies. First, payment can be enforced up to some exogenous amount (enforcement-based credit). Second, default on past promises can be partially monitored by future trading partners (monitoring-based credit). We characterize implementable allocations subject to individual rationality and bilateral efficiency of trades. Consistent with prior literature, we find that money and monitoring-based credit cannot be jointly essential. However, we show that money and enforcement-based credit are jointly essential as long as neither payment instrument by itself is sufficient to implement a first-best. Money is memory, but it is not enforcement.
ISSN:0022-0531
1095-7235
DOI:10.1016/j.jet.2023.105734