A Random Matching Theory.

We develop the theoretical underpinnings of pairwise random matching mechanisms. We formalize the mechanics of matching, and study the links between properties of the different mechanisms and trade frictions. A particular emphasis is placed on providing exact mappings between matching technologies and informational constraints.Random matching ; frictions ; anonymous trading ; spatial intersections ; search

The 2005 Summer Workshop on Money, Banking, and Payments: an overview

This PDP summarizes the papers presented at the 2005 Summer Workshop on Money, Banking, and Payments at the Cleveland Fed. Papers covered a wide variety of topics in monetary theory and policy, banking, and payments systems research. Topics ranged from optimal monetary policy, optimal bank contracts, the private supply of money, the coexistence of credit, money, and capital, the design of payment systems, and international currencies. Effort was made to calibrate models and bring them closer to the data. These contributions illustrate the progress made in the field of monetary theory.Monetary policy ; Monetary theory ; Banks and banking ; Payment systems

Efficient Monetary Allocations and the Illiquidity of Bonds.

We construct a monetary economy with heterogeneity in discounting and consumption risk. Agents can insure against this risk with both money and nominal government bonds, but all trades must be monetized. We demonstrate that a deflationary policy a la Friedman cannot sustain the efficient allocation. The reason is that no-arbitrage imposes a stringent bound on the return money can pay. The efficient allocation can be sustained when bonds have positive yields and – under certain conditions – only if they are illiquid. Illiquidity – meaning bonds cannot be transformed into consumption as efficiently as cash – is necessary to eliminate arbitrage opportunities.Money ; Heterogeneity ; Friedman Rule ; Illiquid Assets

Existence of independent random matching

This paper shows the existence of independent random matching of a large (continuum) population in both static and dynamic systems, which has been popular in the economics and genetics literatures. We construct a joint agent-probability space, and randomized mutation, partial matching and match-induced type-changing functions that satisfy appropriate independence conditions. The proofs are achieved via nonstandard analysis. The proof for the dynamic setting relies on a new Fubini-type theorem for an infinite product of Loeb transition probabilities, based on which a continuum of independent Markov chains is derived from random mutation, random partial matching and random type changing.Comment: Published at http://dx.doi.org/10.1214/105051606000000673 in the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org

A Theory of Continuum Economies with Independent Shocks and Matchings

Numerous economic models employ a continuum of negligible agents with a sequence of idiosyncratic shocks and random matchings. Several attempts have been made to build a rigorous mathematical justification for such models, but these attempts have left many questions unanswered. In this paper, we develop a discrete time framework in which the major, desirable properties of idiosyncratic shocks and random matchings hold. The agents live on a probability space, and the probability distribution for each agent is naturally replaced by the population distribution. The novelty of this approach is in the assumption of unknown identity. Each agent believes that initially he was randomly and uniformly placed on the agent space, i.e., the agent's identity (the exact location on the agent space) is unknown to the agent.random matching, idiosyncratic shocks, the Law of Large Numbers, aggregate uncertainty, mixing

A Theory of Continuum Economies with Idiosyncratic Shocks and Random Matchings

Many economic models use a continuum of negligible agents to avoid considering one person's effect on aggregate characteristics of the economy. Along with a continuum of agents, these models often incorporate a sequence of independent shocks and random matchings. Despite frequent use of such models, there are still unsolved questions about their mathematical justification. In this paper we construct a discrete time framework, in which major desirable properties of idiosyncratic shocks and random matchings hold. In this framework the agent space constitutes a probability space, and the probability distribution for each agent is replaced by the population distribution. Unlike previous authors, we question the assumption of known identity - the location on the agent space. We assume that the agents only know their previous history - what had happened to them before, - but not their identity. The construction justifies the use of numerous dynamic models of idiosyncratic shocks and random matchings.random matching; idiosyncratic shocks; the Law of Large Numbers; aggregate uncertainty; mixing

Cooperation among strangers: an experiment with indefinite interaction

We study the emergence of norms of cooperation in experimental economies populated by strangers interacting indefinitely and lacking formal enforcement institutions. In all treatments the efficient outcome is sustainable as an equilibrium. We address the following questions: can these economies achieve full efficiency? Which institutions for monitoring and enforcement promote cooperation? Finally, what classes of strategies are employed to achieve high efficiency? We find that, first, cooperation can be sustained even in anonymous settings; second, some type of monitoring and punishment institutions significantly promote cooperation; and, third, subjects dislike indiscriminate strategies and prefer selective strategies.experiments, repeated games, cooperation, equilibrium selection, prisoners’ dilemma, random matching

Matching and Anonymity

This work introduces a rigorous set-theoretic foundation of deterministic bilateral matching processes and studies systematically their properties. In particular, it formalizes a link between matching and informational constraints by developing a notion of anonymity that is based on the agents\u27 matching histories. It also explains why and how various matching processes generate different degrees of informational isolation in the economy. We illustrate the usefulness of our approach to modeling matching frameworks by discussing the classical turnpike model of Townsend

Anonymous Markets and Monetary Trading

We study infinite-horizon monetary economies characterized by trading frictions that originate from random pairwise meetings, and commitment and enforcement limitations. We prove that introducing occasional trade in \u27centralized markets\u27 opens the door to an informal enforcement scheme that sustains a non-monetary efficient allocation. All is required is that trading partners be patient and their actions be observable. We then present a matching environment in which trade may occur in large markets and yet agents\u27 trading paths cross at most once. This allows the construction of models in which infinitely lived agents trade in competitive markets where money plays an essential role