In a random-matching monetary economy, efficient and inefficient sellers choose between home or market production. Since inefficient sellers bargain up their prices, two equilibria may exist– with high or low market participation–depending on extent of heterogeneity and frictions. In equilibrium, the presence of inefficient sellers on the market has two opposing effects. It raises trading frequencies, so it lowers consumption risk, but it lowers the value of money, raising prices. This may reduce trading efficiency. Equilibria with full and limited participation can coexist; when average efficiency is high and agents are patient, limited participation is socially preferable.
Camera, G., and F. Vesely (2006). On market activity and the value of money. Journal of Money, Credit, and Banking 38(2), 495-509. http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)91538-4616
This is the accepted version of the following article:
Camera, G., and F. Vesely (2006). On market activity and the value of money.Journal of Money, Credit, and Banking, 38(2), 495-509.