Compensation for Quality Difference in a Search Model of Money

15 Pages Posted: 11 Jul 2005


We study an economy in which there is always double coincidence of wants, agents have perfect information about qualities of goods, and there are no transaction costs. The hold-up problem arises because efforts invested in improving quality prior to search may not be compensated in the market. Situations in which barter fails to motivate quality improvement are identified. With money, however, the extra effort in quality improvement will be compensated when high-quality good producers trade with agents holding both the low-quality good and money. Injection of money can induce almost all agents to produce the high-quality good.

Suggested Citation

Fong, Yuk-fai and Szentes, Balázs, Compensation for Quality Difference in a Search Model of Money. International Economic Review, Vol. 46, No. 3, pp. 957-971, August 2005, Available at SSRN:

Yuk-fai Fong (Contact Author)

Northwestern University - Department of Management & Strategy ( email )

Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
United States

Balázs Szentes

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States
(773) 702-9127 (Phone)

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