Search, Bargaining, Money, and Prices Under Private Information

Abstract

This paper presents a model of money and search where bargaining determines prices and the quality of goods is private information. It studies how a lemons problem affects the purchasing power of money. There are multiple, Pareto‐ranked equilibria. The superior equilibrium, where no lemons are produced, exists even if information about quality is relatively scarce. In other equilibria, there is price dispersion, and uninformed buyers pay higher prices than informed buyers for all goods. Taxing money balances (a proxy for inflation) makes buyers less selective, thus reducing the average quality of supply and the premium paid for known quality.