| I develop a model of a decentralized, exchange economy where agents who meet via random, pairwise matching choose a search intensity along with a trading strategy to maximize their utility. Search intensity serves as a proxy for the amount of resources devoted to exchange. In regard to trading strategies, agents decide whether or not they will participate in the market, and if so, whether they will engage in barter or fiat monetary exchange. I develop and compare the barter and monetary equilibria. Under what conditions is the monetary equilibrium superior to the barter equilibrium? Exactly why is it superior? This model is then extended in two ways. First, I change the way agents choose search effort. This change does not overturn the original results. Second, I consider a production economy instead of an endowment economy. In this economy with production, search effort and production effort move in the same direction in response to a change in exogenous parameters. Finally, a potential opportunity cost of holding money is introduced. I then analyze how this holding cost of money affects the trading strategy, price level, velocity, and social welfare. |
