dkw - Chapter 6 Search Models of Production and Exchange...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 6 Search Models of Production and Exchange 6.1 Introduction In this chapter we study a class of equilibrium search models …rst introduced by Diamond (1982), and since extended by several others. The basic model is a prototype used to illustrate how multiple equilibria can arise. It can also be generalized and applied in many contexts, including monetary eco- nomics, where the frictions inherent in search theory lead naturally to a role for money. To keep things simple, in this chapter, we assume the terms of trade are exogenous; that is, we assume that goods are indivisible and there- fore every exchange is a one-for-one swap. The next chapter takes up the important issue of endogenizing prices using bargaining theory. In the basic framework, there is a sector in which agents locate potential production projects randomly over time, where a project is an opportunity to produce one unit of output at a some cost. In the simplest version there is only one good, but it is assumed that producers do not consume their own output and hence must trade. Traders with goods interact in an exchange sector where they meet bilaterally and, upon meeting, they trade, consume
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
and return to the production sector. 1 A di¤erence between the class of models in this chapter and the model of the labor market studied earlier is that here agents do not form enduring relationships: a pair simply trades once and then parts company. However, a key ingredient here, just like in the labor market, is the aggregate meeting technology. Suppose that this technology displays increasing returns to scale. Then when there are more agents in the exchange sector trade becomes easier and producers are willing to take on more costly projects, increasing the ‡ow of agents into the trading sector. Hence, there are potentially multiple steady state equilibria. There can also be complicated and interesting dynamic equilibria (as emphasized, e.g., by Diamond and Fudenberg 1989). We extend this model in a number of ways. For example, it is easy to include more than one type of commodity and agents with di¤erent tastes. In the multigood version of the model, exchange itself is di¢cult, since you not only have to meet another trader, you have to meet one who both has want you want and wants what you have. As emphasized by Kiyotaki and Wright (1991, 1993), it is this feature that allows money to play a genuine medium of exchange role in the model, a role not at all easy to capture in more traditional general equilibrium theory. One can use the monetary search model to show how …at currency can have value, to analyze how an endogenous commodity money may arise, to discuss international monetary issues, and to address a variety of other questions in monetary economics. We also present a version of the model that 1 Diamond (1982, 1984b) motivates the set up with the following story. The economy consists of islands , on some of which there are trees of various heights bearing coconuts
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 41

dkw - Chapter 6 Search Models of Production and Exchange...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online