Efficient online exchange via fiat money

Mihaela van der Schaar, Jie Xu, William Zame

Research output: Contribution to journalArticle

11 Scopus citations

Abstract

In many online systems, individuals provide services for each other; the recipient of the service obtains a benefit but the provider of the service incurs a cost. If benefit exceeds cost, provision of the service increases social welfare and should therefore be encouraged-but the individuals providing the service gain no (immediate) benefit from providing the service and hence have an incentive to withhold service. Hence, there is scope for designing a protocol that improves welfare by encouraging exchange. To operate successfully within the confines of the online environment, such a protocol should be distributed, robust, and consistent with individual incentives. This paper proposes and analyzes protocols that rely solely on the exchange of fiat money or tokens. The analysis has much in common with work on search models of money but the requirements of the environment also lead to many differences from previous analyses-and some surprises; in particular, existence of equilibrium becomes a thorny problem and the optimal quantity of money is different.

Original languageEnglish (US)
Pages (from-to)211-248
Number of pages38
JournalEconomic Theory
Volume54
Issue number2
DOIs
StatePublished - Oct 1 2013
Externally publishedYes

Keywords

  • Online exchange
  • Token exchange

ASJC Scopus subject areas

  • Economics and Econometrics

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