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Money is an Experience Good: Competition and Trust in the Private Provision of Money
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MWP_2011_06.pdf (269.94 KB)
EUI MWP 2011/06
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1830-7728
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EUI MWP; 2011/06
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MARIMON, Ramon, NICOLINI, Juan Pablo, TELES, Pedro, Money is an Experience Good: Competition and Trust in the Private Provision of Money, EUI MWP, 2011/06 - https://hdl.handle.net/1814/17737
Abstract
We study the interplay between competition and trust as efficiency-enhancing mechanisms in the private provision of money. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a bound on efficiency. Stationary inflation must be non-negative and, therefore, the Friedman rule cannot be achieved. The quality of money can only be observed after its purchasing capacity is realized. In that sense money is an experience good.
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A previous version of this paper was circulated with the title 'Competition and Reputation'. We would like to thank Fernando Alvarez, Huberto Ennis, Robert Lucas, David Levine, and an anonymous referee, for their comments, as well as the participants in the seminars and conferences where this work was presented.