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ON THE WELFARE EFFECTS OF CREDIT ARRANGEMENTS
Author(s) -
Chiu Jonathan,
Dong Mei,
Shao Enchuan
Publication year - 2018
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12315
Subject(s) - economics , welfare , consumption (sociology) , mechanism (biology) , monetary economics , market liquidity , microeconomics , constraint (computer aided design) , inflation (cosmology) , market economy , mechanical engineering , social science , philosophy , physics , epistemology , sociology , theoretical physics , engineering
Abstract This article studies the welfare effects of credit arrangements and how these effects depend on the trading mechanism and inflation. In a competitive market, credit arrangements can be welfare reducing, because high consumption by credit users drives up the price level, reducing consumption by money users who are subject to a binding liquidity constraint. By adopting an optimal trading mechanism, however, these welfare implications can be overturned. Both price discrimination and nonlinear pricing are essential features of an optimal mechanism.