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Thick Market Externality and Concentration of `Money'

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  • Starr, Ross
  • Spini, Pietro Emilio

Abstract

A thick market external e ect is applied to a trading post model of N 3 commodities with transaction costs and distinct bid and ask prices. An existence theorem for general equilibrium with external e ects in the trading post model is stated and proved. Media of exchange occur endogenously as liquid commodities, characterized by a narrow bid/ask price spread. The thick market externality can lead to concentration of the endogenously determined media of exchange towards an equilibrium with a single medium. In a class of examples, we show that if the households have su ciently heterogeneous tastes relative to the size of the economy, the monetary equilibrium leads to higher consumption than the barter equilibrium.

Suggested Citation

  • Starr, Ross & Spini, Pietro Emilio, 2022. "Thick Market Externality and Concentration of `Money'," University of California at San Diego, Economics Working Paper Series qt8qr0r0n7, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt8qr0r0n7
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    References listed on IDEAS

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