Matching and Money

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Abstract
We analyze matching models of monetary exchange where agents get to choose endogenouslythe individuals (or at least the types of individu- als) that they meet, rather than having agents matched exogenously and at random, as inthe previous literature. Agents arestillrestrictedtoone bilateral trade per period, and specialization can still lead to a double coincidence problem in the exchange process. Hence, there is still a role for money. We use the framework to revisit some issues that had been addressedintheliteraturewithrandommatching. Inparticular,wechar- acterize conditions under whichat money may be used as a medium of exchange and may be essential for supporting e±cient allocations. We also show how the implications of a standard commodity money model are a®ected by making matching endogenous. Some basic insights from random matching theory go through, although the details change; other times the results are quite di®erent when we assume endogenous rather than exogenous randommatching.

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