Heterogeneity and Lotteries in Monetary Search Models

BERENTSEN, MOLICO, AND WRIGHT (2002), hereafter BMW, introduce lotteries into monetary search models to deal with indivisibilities of goods and money. They obtain three key results. First, with indivisible goods and fiat money, goods always change hands with probability one while money can trade with probability less than one. Second, with fiat money, a social planner cares only about lotteries over goods, not money. Third, with divisible goods, the quantity traded is always less than or equal to the efficient quantity, q ≤ q∗. BMW conjecture that these results are driven by the “fiat nature of money.” In this paper, we construct a search model with fiat money to show that none of these results survive the introduction of ex ante heterogeneous agents. Thus, BMW’s results are mainly driven by the symmetry of preferences across agents, not the fiat nature of money.