The Coexistence of Money and Credit as Means of Payment∗

This paper studies the choice of payment instruments in a simple model where both money and credit can be used as means of payment. We endogenize the acceptability of credit by allowing retailers to invest in a costly record-keeping technology. Our framework captures the two-sided market interaction between consumers and retailers, leading to strategic complemen-tarities that can generate multiple steady-state equilibria. In addition, limited commitment makes debt contracts self-enforcing and yields an endogenous upper bound on credit use. Our model can explain why the demand for credit declines as inflation falls, and how hold-up prob-lems in technological adoption can prevent retailers from accepting credit as consumers continue to coordinate on cash usage. We show that when money and credit coexist, equilibrium is generi-cally inefficient and changes to the debt limit are not neutral. We also discuss the extent to whic