Social orderings for the assignment of indivisible objects

In the assignment problem of indivisible objects with money, we study social ordering functions which satisfy the requirement that social orderings should be independent of changes in preferences over infeasible bundles. We combine this axiom with efficiency, consistency and equity axioms. Our result is that the only social ordering function satisfying those axioms is the leximin function in money utility.     

Mixed bundling auctions

We study multi-object auctions where agents have private and additive valuations for heterogeneous objects. We focus on the revenue properties of a class of dominant strategy mechanisms where a weight is assigned to each partition of objects. The weights influence the probability with which partitions are chosen in the mechanism. This class contains efficient auctions, pure bundling auctions, mixed bundling auctions, auctions with reserve prices and auctions with pre-packaged bundles. For any number of objects and bidders, both the pure bundling auction and separate, efficient auctions for the single objects are revenue-inferior to an auction that involves mixed bundling.     

Market and non-market mechanisms for the optimal allocation of scarce resources

A number of identical objects is allocated to a set of privately informed agents. Agents have linear utility in money. The designer wants to assign objects to agents that possess specific traits, but the allocation can only be conditioned on the willingness to pay and on observable characteristics. I solve for the optimal mechanism. The choice between market or non-market mechanisms depends on the statistical linkage between characteristics valued by the designer and willingness to pay.     

Search, money, and inflation under private information

I study monetary exchange and inflation when buyers have private information about their willingness to pay for certain goods. Introducing imperfect information in the Lagos-Wright [A unified framework for monetary theory and policy analysis, J. Polit. Economy 113(3) (2005) 463-484] economy shows that the existence of monetary equilibrium is a more robust feature of the environment. In general, my model has a monetary steady state in which only a proportion of the agents hold money. Agents who do not hold money cannot participate in trade in the decentralized market. The proportion of agents holding money is endogenous and depends (negatively) on the level of expected inflation. As in Lagos and Wright's model, in equilibrium there is a positive welfare cost of expected inflation, but the origins of this cost are very different.     

Rational belief structures and rational belief equilibria

Summary The paper introduces some simplifying tools and methods for studying Rational Beliefs and for proving existence of Rational Belief Equilibria. We identify a set of stable non-stationary stochastic processes, named SIDS processes. Furthermore we introduce the concept of a Rational Belief Structure, which formulates the Rational Beliefs of the agents as beliefs about the distribution of exogenous variables and the beliefs of other agents. The use of the developed apparatus is demonstrated by showing existence of a set of Rational Belief Equilibria in an Overlapping Generations Model with money and one commodity.The results presented in this paper are taken from my Ph.D. thesis from Stanford University ([13]). The dissertation is devoted to the study of the theory of Rational Beliefs as developed by Mordecai Kurz. I gratefully acknowledge the inspiration obtained from innumerable discussions with him over the years about this subject. His suggestions were instrumental for writing the thesis and this paper. The paper benefited much from a thorough reading by Trinidad Casasus, Mordecai Kurz and Ho-Mou Wu. Financial support from The Academy for Research (Forskerakademiet), Aarhus, Denmark and The University of Copenhagen, during my time as a Ph.D. student and from Danish Social Science Research Council thereafter and in addition from Fondazione Eni Enrico Mattei of Milan, Italy is gratefully acknowledged.     

Coalitional strategy-proofness and fairness

This paper considers the problem of assigning a finite number of indivisible objects, like jobs, houses, positions, etc., to the same number of individuals. There is also a divisible good (money) and the individuals consume money and one object each. The class of fair allocation rules that are strategy-proof in the strong sense that no coalition of individuals can improve the allocation for all of its members, by misrepresenting their preferences, is characterized. It turns out that given a regularity condition, the outcome of a fair and coalitionally strategy-proof allocation rule must maximize the use of money subject to upper quantity bounds determined by the allocation rule. If available money is nonnegative, objects may be jobs and the distribution of money a wage structure. If available money is negative, the formal model may reflect a multi-object auction. In both cases fairness means equilibrium, i.e., that each individual receives a most demanded object. I would like to thank Tommy Andersson, Bo Larsson, Zaifu Yang and the participants of the seminars in Copenhagen and Lund for helpful comments on this paper. I will also thank an anonymous referee for very valuable comments. Financial support from The Jan Wallander and Tom Hedelius Foundation is gratefully acknowledged.     

Money as a Generic Particular: Marx and Simmel on the Structure of Monetary Denominations

ABSTRACT

This article is concerned with the structure of monetary denominations of economic value. Marx and Simmel analyze this structure by means of references to objects of mere catallactic validity. These objects are ontologically atypical insofar as they are particulars of the genus commodity. Understanding money through generic particulars elucidates the conceptual link between money as a unit of account and money as a means of payment. This initially perplexing idea captures a fundamental characteristic of money without committing to either a commodity theory or a claim theory of money. A modification of the notion ‘commodity’ allows for a conception of money as a generic particular that is consistent with contemporary accounts of money as abstract purchasing power residing in different forms of liabilities and claims denominated in a common quantitative scale.     

Temporary bubbles

This article studies the dynamics of an overlapping generations model with capital, money and cash-in-advance constraints. The economy can exhibit two different regimes. In the first one, the cash-in-advance constraint is binding and money is a dominated asset. In the second one, the constraint is strictly satisfied and money has the same return as capital. When the second regime holds on a finite number of periods, we say that the economy experiences a temporary bubble. We prove that temporary bubbles can exist in an economy, which would experience under-accumulation without money. We also show that cyclical bubbles may occur.     

Does and Should a Commodity Medium of Exchange Have Relatively Low Storage Costs?

I provide new existence and welfare results for a version of the Kiyotaki-Wright model. I construct an equilibrium where all agents use mixed strategies. Consequently, an object with a higher storage cost must have a higher acceptability. Therefore, the endogenous transaction pattern corresponds to the observation that money is dominated in rate of return by other assets (e.g., bonds), something that is a central issue in monetary economics. Furthermore, at least in a neighborhood of equal storage costs, the equilibrium that I construct Pareto dominates alternative equilibria in which better objects are widely accepted.     

Money and capital as competing media of exchange

We construct a model where capital competes with fiat money as a medium of exchange, and establish conditions on fundamentals under which fiat money can be both valued and socially beneficial. When the socially efficient stock of capital is too low to provide the liquidity agents need, they overaccumulate productive assets to use as media of exchange. When this is the case, there exists a monetary equilibrium that dominates the nonmonetary one in terms of welfare. Under the Friedman Rule, fiat money provides just enough liquidity so that agents choose to accumulate the same capital stock a social planner would.     

THE DISTRIBUTION OF MONEY BALANCES AND THE NONNEUTRALITY OF MONEY*

Recent monetary models with explicit microfoundations are made tractable by assuming that agents have access to centralized markets after one round of decentralized trade. Given quasi‐linear preferences, this makes the distribution of money degenerate—which keeps the models simple but precludes the discussion of distributional effects of monetary policy. We generalize these models by assuming two rounds of trade before agents can readjust their money holdings to study a range of new distributional effects analytically. We show that unexpected, symmetric lump‐sum money injections may increase short‐run output and welfare, whereas asymmetric injections may increase long‐run output and welfare.     

Societal benefits of illiquid bonds

In this paper, I provide a possible explanation of why nominally risk-free bonds are essential in monetary economies. I argue that the role of nominal bonds is to enable agents to engage in intertemporal exchanges of money. I show that bonds can only serve this role if they are illiquid (costly to exchange for goods). Finally, I argue that in economies in which nominal bonds are essential, it is optimal for monetary policy to respond to changes in the distribution of liquidity needs.     

Monetary policy and efficiency in over‐the‐counter financial trade

We develop a monetary model that incorporates over‐the‐counter (OTC) asset trade. After agents have made their money holding decisions, they receive an idiosyncratic shock that affects their valuation for consumption and, hence, for the unique liquid asset, namely money. Subsequently, agents can choose whether they want to enter the OTC market in order to sell assets and thus boost their liquidity or to buy assets and thus provide liquidity to other agents. In our model, inflation affects not only the money holding decisions of agents, as is standard in monetary theory, but also the entry decision of these agents in the financial market. We use our framework to study the effect of inflation on welfare, asset prices and OTC trade volume. In contrast to most monetary models, which predict a negative relationship between inflation and welfare, we find that inflation can be welfare improving within a certain range, because it mitigates a search externality that agents impose on one another when they make their OTC market entry decision. Also, an increase in the holding cost of money will lead to a decrease in asset prices, a regularity that is well documented in the data and often considered anomalous.     

The optimality of nominal contracts

Summary. This paper presents a model in which agents choose to use money as a medium of exchange, a means of payment, and a unit of account. The paper defines conditions under which nominal contracts, promising future payment of a fixed number of units of fiat money, prove to be the optimal contract form in the presence of either relative or aggregate price risk. When relative prices are random, nominal contracts are optimal if individuals have ex ante similar preferences over future consumption. When the aggregate price level is random, whether from shocks to the money supply or aggregate output, nominal contracts (perhaps coupled with equity contracts) lead to optimal risk-sharing if individuals have the same degree of relative risk aversion. Finally, nominal contracts may be optimal if the repayment of contracts is subject to a binding cash-in-advance constraint. In this case, a contingent contract increases the risk of holding excessive cash balances. Received: March 29, 1996; revised version: February 25, 1997     

A monetary economy with counterfeiting

We apply a search-theoretic model of fiat money to study the equilibria in which counterfeit money is accepted. Circulation of counterfeit money presupposes that the agents are impatient and that the punishment for holding it is not too severe. When the stock of genuine money is small counterfeit money may improve the efficiency of the economy. We establish that a monetary economy can be created with private provision of (counterfeit) money as long as the ruler has control over punishments. Totally noncooperative provision will fail as the economy will become flooded with money.     

Private money and bank runs

Abstract This paper studies bank runs in a model with private money. We show that allowing claims on demand deposits to circulate as a medium of exchange can help prevent bank runs. In our model, there exists a unique banking equilibrium where no one demands early withdrawals of real goods and agents in need of liquidity use private money to finance consumption. With private money, the unique equilibrium not only eliminates bank runs but also improves banking efficiency. The implications of our model are consistent with the evidence from the banking history of the United States.     

Individual and Aggregate Real Balances in a Random-Matching Model

This article investigates the characteristics of stationary single-price equilibrium in a monetary random-matching model where agents can hold an arbitrary amount of divisible money and where production is costly. At such an equilibrium, agents' money holdings are endogenously determined and uniformly bounded. A refinement of weakly undominated strategies is argued to be necessary. It is shown that a continuum of single-price equilibria indexed by the aggregate real-money balance exists if one such equilibrium exists. Equilibria with different money-holdings upper bounds, hence different distributions, but with identical aggregate real-money balances can coexist.     

Strategyproof and Nonbossy Multiple Assignments

We consider the allocation of heterogeneous indivisible objects without using monetary transfers. Each agent may be assigned more than one object. We show that an allocation rule is strategyproof, nonbossy, and satisfies citizen sovereignty if and only if it is a sequential dictatorship . In a sequential dictatorship agents are assigned their favorite objects that are still available, according to a sequentially endogenously determined hierarchy of the agents. We also establish that replacing nonbossiness by a stronger criterion restricts the characterized class of allocation rules to serial dictatorships , in which the hierarchy of the agents is fixed a priori.     

On two competing mechanisms for priority-based allocation problems

We consider the priority-based allocation problem: there is a set of indivisible objects with multiple supplies (e.g., schools with seats) and a set of agents (e.g., students) with priorities over objects (e.g., proximity of residence area). We study two well-known and competing mechanisms. The agent-optimal stable mechanism (AOSM) allots objects via the deferred acceptance algorithm. The top trading cycles mechanism (TTCM) allots objects via Gale's top trading cycles algorithm. We show that the two mechanisms are equivalent, or TTCM is fair (i.e., respects agents’ priorities), or resource monotonic, or population monotonic, if and only if the priority structure is acyclic. Furthermore, if AOSM fails to be efficient (consistent) for a problem, TTCM also fails to be fair (consistent) for it. However, the converse is not necessarily true.     

PRIVATE VERSUS PUBLIC MONEY*

I show that the nature of agents' production determines whether they should issue money. I use a matching model with no commitment and no enforcement. Some agents can produce goods, whereas others are unproductive. All agents can produce at a cost a distinguishable, intrinsically useless but durable good: notes. Productive agents produce red notes whereas unproductive agents produce green notes. I find that green notes are the most efficient means of exchange, as they implement more allocations than red notes and at a lower cost. Therefore, unproductive agents should issue money. I associate unproductive agents to agents producing public goods.