By Ramon Marimon, Juan Pablo Nicolini and Pedro Teles
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.