On the essentiality of e-money /

Recent models of payment systems building on the Lagos-Wright framework include Kahn and Roberds (2009), Li (2011) and Monnet and Roberds (2008).10 Within this literature there is a line of research using the mechanism design approach to study the essentiality of money and other means of payment.11 To the best of our knowledge, this paper is the first in this literature to study the essentiality o [...] These are the three ineffi ciencies highlighted in the monetary literature: the cash-in-advance constraint, the search friction and the holdup problem. [...] Thanks to the revelation principle, any equilibrium allocation of a Bayesian game under a mechanism can be implemented by a direct mechanism, where agents report their private information to the mechanism designer (here reporting the money balances to the money issuer), and the mechanism designer makes monetary transfers based on the report. [...] This assumption simplifies the political economy, since there is no strategic interaction between the money issuer and the e-money issuer.14 Moreover, we assume that the e-money issuer has to follow the same growth rate µ of money. [...] Here, since z and n are already denominated in the unit of the numeraire, the continu- ation value in the CM, Wb (a), depends only on the sum of the real balances of money z̃ and e-money ñ, that is, a ≡ z̃ + ñ.