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Money as a transaction technology : a game-theoretic approach Wiens, Elmer G.

Abstract

A barter economy and a monetary economy are modelled using the cooperative game approach. The feature that distinguishes the two economies is the manner in which exchange activities are organized in the face of transaction costs. While division of labour or specialization is exploited in the monetary economy's technology of exchange, it is not exploited in that of the barter economy. The presence of a medium of exchange in the monetary economy permits its specialized traders to operate efficiently. The cooperative game approach admits group rationality along with the usual assumption of individual rationality. Group rationality means that individuals are able to perceive their interdependence. Money is explained as the product of interactions between individual rationality (utility maximizing consumers and profit maximizing traders) and group rationality (the ability to perceive the benefits of monetary exchange versus barter exchange). Consequently, money is viewed not as an object, but as an institution. Its value reflects the relative superiority of a monetary economy over a barter economy.

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