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COMPENSATION FOR QUALITY DIFFERENCE IN A SEARCH MODEL OF MONEY *
Author(s) -
Fong Yukfai,
Szentes Balázs
Publication year - 2005
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/j.1468-2354.2005.00353.x
Subject(s) - barter , quality (philosophy) , compensation (psychology) , microeconomics , economics , database transaction , business , commerce , monetary economics , computer science , market economy , psychology , philosophy , epistemology , psychoanalysis , programming language
We study an economy in which there is always double coincidence of wants, agents have perfect information about qualities of goods, and there are no transaction costs. The hold‐up problem arises because efforts invested in improving quality prior to search may not be compensated in the market. Situations in which barter fails to motivate quality improvement are identified. With money, however, the extra effort in quality improvement will be compensated when high‐quality good producers trade with agents holding both the low‐quality good and money. Injection of money can induce almost all agents to produce the high‐quality good.