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Perfectly competitive bilateral exchange without discounting

In a random-matching economy of traders who maximize cumulative consumption (overtaking criterion), the stationary, Markov, Bayesian-perfect equilibrium is studied. At such equilibrium, two results hold: (1) perfect substitutability between current and future consumption implies a no-surplus conditi...

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Bibliographic Details
Published in:Journal of monetary economics 2010-03, Vol.57 (2), p.121-131
Main Authors: Green, Edward J., Zhou, Ruilin
Format: Article
Language:English
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Summary:In a random-matching economy of traders who maximize cumulative consumption (overtaking criterion), the stationary, Markov, Bayesian-perfect equilibrium is studied. At such equilibrium, two results hold: (1) perfect substitutability between current and future consumption implies a no-surplus condition; and (2) by the no-surplus condition, there is a nominal price at which all trades must occur. These results strengthen the seminal results of Ostroy (1973) regarding monetary bilateral exchange in two ways: the incentive compatibility of the equilibrium trading pattern is established and a less roundabout trading pattern enhances welfare by enabling consumption to occur more frequently.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2010.01.001