Money, Technology Choice and Pattern of Exchanges in Search Equilibrium

Abstract: This paper examines in a decentralized trading environment how money may generate real effects via technology choice (high vs. low) by modeling explicitly the pattern of exchanges within a random-matching framework. We inquire (i) whether the presence of trade frictions grants the high technology disadvantageous and (ii) whether money encourages the adoption of the high technology. While high-quality goods yield greater consumption value, they incur a production time delay and a greater production cost. We allow buyers to form their best responses to accepting different types of goods. In a complete information world, we characterize the steady-state monetary equilibrium with either instantaneous or non-instantaneous production. We show how the introduction of money affects the technology choice by mitigating the high technology’s disadvantage in production time delay. We also show that when production takes time, the extent to which the high-technology equilibrium yields higher social welfare than the low-technology equilibrium depends crucially on the quantity of money in the economy. Additionally, we identify sources of social inefficiency caused by search frictions that can lead to under-investment in the advanced technology i