Money, Intermediaries and Cash-in-Advance Constraints

I study a search economy in which intermediaries are the driving force co-ordinating the economy on the use of a unique, common medium of exchange for transactions. If search frictions delay trade, intermediaries offering immediate exchange opportunities can make arbitrage gains from a price spread. As these intermediaries take over transactions, they are confronted to the double coincidence problem of the search market. In the model presented here, intermediaries solve this problem best by imposing a common medium of exchange to other agents, such that a Cash-in-Advance constraint results: Agents trade twice in order to consume, once to exchange their production against the medium of exchange, and once to receive their consumption good. To select between multiple equilibria, I introduce a criterion of minimal coalition proofness, whereby arbitrarily small coalitions may induce a change from one equilibrium to another. I show that any minimally coalition-proof equilibrium is Pareto-efficient, and characterize the full set of minimally coalition-proof equilibria of this economy.