handoutsearch

# handoutsearch - A Primer on Search Models of Money Based on...

This preview shows pages 1–2. Sign up to view the full content.

A Primer on Search Models of Money Based on Trejos and Wright (1995) “Search, Bargaining, Money, and Prices”, Journal of Political Economy, p.118-39. 1 Environment Unit measure of agents. Pref: each agent has preferences over a variety of goods that can be pro- duced by a fraction x of the population. q units consumed generates utility u ( q ) Tech: each agent can produce q units of one nonstorable good at cost cq . Thegoodisdemandedbyfract ion x of the pop. E cient quantity is u 0 ( q )= c (i.e. MB=MC). Fraction M of the population are endowed with 1 unit of indivisible money. Inventory is bounded above by 1 . Matching technology: It any given period the probability of matching with another agent is β. Given above: arrival rate of an appropriate buyer for a seller is βMx (meet agent with money who likes my good) ” seller for a buyer is β (1 M ) x Normalize βx =1 . Bargaining Protocol When an appropriate buyer and seller meet, they bargain over q (the amount of good to be traded for a unit of money p = 1 q ). In 1st generation models, q ,so p = 1 independent of M . Nash bargaining. Can be formalized as a sequential game between the buyer and seller a la Rubinstein (1982, Ecta). 2 Steady State Equilibrium in the Trejos-Wright Model In 3 parts: 1. taking prices as given (i.e. q t = Q t ), determine the value of being a buyer V bt ( Q t ) or a seller V st ( Q t ) .

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## handoutsearch - A Primer on Search Models of Money Based on...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online