False Friends

Due to the competitive nature of business as a whole, it is sometimes difficult to develop moral relationships with others. However, though friendships are possible in business, most relationships must be kept on the lower level of business acquaintanceship.     

A theory of optimal denominations for government liabilities

Summary The design and implementation of monetary arrangements has important implications for the welfare and determinacy properties of equilibria that arise under competitive monetary exchange. In this paper we consider one particular feature of a monetary arrangement. We ask whether a government should issue its liabilities so that they are imperfectly divisible and whether they should at the same time regulate private intermediation. We argue that the answer is affirmative. We then consider the optimal minimum denomination for government liabilities given that the social planner would like to implement a particular equilibrium. We show that generically the steady state equilibria supported by minimum denominations that result in Pareto optimal allocations are indeterminate. We then pose the question, what is the best (in a Pareto sense) stationary equilibrium that can be supported, subject to the constraint that the equilibrium display certain minimal determinacy properties? The existence of an optimum in this sense is established. Such equilibria are supported by having the government issue indivisible liabilities with appropriately chosen minimum denominations.Research supported in part by NSF Grant SES-8921346. We have benefitted from conversations with Stan Engerman, Rod Garratt, Glenn MacDonald, Anne Villamil, Neil Wallace and Warren Weber, and from the comments of seminar participants at Cornell and Rochester. We are especially grateful to Ed Prescott for his suggestions.