Privately Issued I.O.U.s as a Medium of Exchange
A fundamental problem for any agent wishing to exchange her goods is to ensure that she receives value back when she abandons control over her goods. In a barter economy with intermediate exchange agents are sure to receive value in return because goods are exchanged on the spot.14 However, as was argued in the preceding chapter, barter with intermediate exchange is costly and burdensome if there is a lack of double coincidence of needs and wants. Hence, if physical goods are not to be exchanged directly between agents for cost reasons, some other asset has to take over the role of a medium of exchange. The quality of this asset will be a prime determinant of how certain an agent can be to receive adequate value in return.
KeywordsEquilibrium Price Equilibrium Path External Market Total Wealth Debt Contract
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