Search, Bargaining, Money, and Prices

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9308687 Wright Under his previous NSF grant, the investigator used search theory to formalize the transactions role of money. This was an important contribution because it allowed analysts to rigorously study the way preferences, production possibilities, technology and market frictions shape the pattern of trade. Work using a search-theoretic approach to money demand is providing many new insights into money's function and the relationships between money and real variables. This project will develop a new line of bargaining monetary models of search and price formation, introduce credit into search models of money. The project will continue research on the microfoundations of "who meets who and how" that are behind the entire search framework, on an evolutionary approach to search models of money, and on money with private information. The research on price formation addresses an important criticism of existing models of money demand. These models are incomplete, in the sense that while they analyze the exchange process, they neglect the determination of prices. Either these models assume that prices are fixed, or they assume that objects are indivisible and therefore must trade one-for-one, or they impose some other ad hoc assumption on prices. The framework developed under this project has explicit bilateral bargaining over prices, so that monetary exchange rates are not assumed but derived from the model. The development of these models will permit the systematic study of the way the underlying strategic environment affects money and price formation. ***