Money, Technology Choice and Pattern of Exchange in Search Equilibrium

This paper examines the production aspect of money to bridge between the search-theoretic models and the canonical Walrasian growth models. In this paper, we argue that money can generate real effects via technology choice (high vs. low), we model explicitly the pattern of exchanges to explore through which channels money affects technology choice. We inquire (i) whether money encourages adoption of the high technology and (ii) whether the presence of trade frictions grants the high technology advantageous. While high quality goods yield greater consumption value, they incur a production time delay and a greater production cost. We allow buyers to form their best responses to accepting different types of goods. In a complete information world, we characterize the steady-state monetary equilibrium with both instantaneous and non-instantaneous production. We provide conditions under which the high technology equilibria is Pareto dominant or social welfare-enhancing, depending crucially on the quantity of money in the economy if production takes time. We examine how the introduction of money affects the technology choice by mitigating the high technology's disadvantage in production delay. We then identify a social inefficiency caused by producers' under-investment in the advanced technology in decentralized equilibrium