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Money, Credit, and Allocation Under Complete Dynamic Contracts and Incomplete Markets

Author

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  • S. Rao Aiyagari

    (University of Rochester)

  • Stephen D. Williamson

    (University of Iowa)

Abstract

We construct a dynamic heterogeneous-agent model with random uninsurable endowments. Two allocation mechanisms are considered, one with long-term complete credit arrangements under private information, and one with incomplete competitive markets. A role for money arises due to random limited participation. A Friedman rule is optimal in the first economy, and replicates a pure credit arrangement in the second. Computational results show that steady state allocations are quite different under the two arrangements, though the responses to changes in long-run inflation are similar.

Suggested Citation

  • S. Rao Aiyagari & Stephen D. Williamson, 1998. "Money, Credit, and Allocation Under Complete Dynamic Contracts and Incomplete Markets," Game Theory and Information 9802003, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpga:9802003
    Note: Type of Document - PDF; prepared on Acrobat PDF; pages: 43 ; figures: included
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    References listed on IDEAS

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    1. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-748, September.
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    Cited by:

    1. Stephen D. Williamson, 1998. "Payment systems with random matching and private information," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 551-572.

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    More about this item

    Keywords

    97-20;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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