Economic Theory

, Volume 54, Issue 2, pp 211–248 | Cite as

Efficient online exchange via fiat money

Research Article

Abstract

In many online systems, individuals provide services for each other; the recipient of the service obtains a benefit but the provider of the service incurs a cost. If benefit exceeds cost, provision of the service increases social welfare and should therefore be encouraged—but the individuals providing the service gain no (immediate) benefit from providing the service and hence have an incentive to withhold service. Hence, there is scope for designing a protocol that improves welfare by encouraging exchange. To operate successfully within the confines of the online environment, such a protocol should be distributed, robust, and consistent with individual incentives. This paper proposes and analyzes protocols that rely solely on the exchange of fiat money or tokens. The analysis has much in common with work on search models of money but the requirements of the environment also lead to many differences from previous analyses—and some surprises; in particular, existence of equilibrium becomes a thorny problem and the optimal quantity of money is different.

Keywords

Online exchange Token exchange 

JEL Classification

D51 E40 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.Department of Electrical EngineeringUniversity of CaliforniaLos AngelesUSA
  2. 2.Department of EconomicsUniversity of CaliforniaLos AngelesUSA

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