Money is an Experience Good: Competition and Trust in the Private Provision of Money

By Ramon Marimon, Juan Pablo Nicolini and Pedro Teles

http://d.repec.org/n?u=RePEc:bge:wpaper:563&r=dge

We study the interplay between competition and trust as efficiency-enhancing mechanisms in the private provision of money. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a bound on efficiency. Stationary inflation must be non-negative and, therefore, the Friedman rule cannot be achieved. The quality of money can only be observed after its purchasing capacity is realized. In that sense money is an experience good.

Can the private provision of money work out better than the public one? This paper seems to indicate that the answer is no, unless there is full commitment by the issuer to preserve the future value of money or, in the absence of this commitment, that there is a very high level of trust in the issuer. If any of the two is lacking, even competition would not help. This is of special interest as it has often been argued that competition is what would keep private issuers from abusing their position.

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One Response to Money is an Experience Good: Competition and Trust in the Private Provision of Money

  1. Noni Mausa says:

    Since money is essentially a pledge of future effort*, it’s obvious that trust and its obverse, commitment, are necessary. It seems to me that a slight level of inflation (or initial overpayment) is also necessary, to compensate for the inevitable losses incurred between the giving of the pledge and the redeeming of it.

    Can privately issued money be trusted? It seems to me that the potential for cheating (by the issuer) is so large as to make this system inherently untrustworthy over any long time span ~10 years or more. A generational buildup of such pledges, in the form of savings, for instance, or pension obligations, becomes a target as it grows. Insufficient regulation with rubber teeth leaves such accumulations vulnerable to theft, default, or other sorts of degradation.

    Over a working lifetime people are wise to accumulate money-pledges, to provide for their old age. From 1950 – 75 they did so, in the most productive generation ever known. Savings in the form of investments, real estate, deferred salary (pensions) and social infrastructure were laid down by the WWII generation and their children, the baby-boomers. But by the time the first boomers began retiring all that accumulation had been opened up to predation and default. Essentially, they had expended effort in their productive years in return for a large promise of future support which was, post-1980, structurally defaulted upon.

    For generational stability, only something with a long time frame can be trusted to manage the put and take of money. At present, though national governments have their own problems, they are the only agents which inherently endure over many generations.

    Noni

    * That is, future effort by unspecified participants in the monetary system in question.

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