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The threat of counterfeiting in competitive search equilibrium

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  • Shao, Enchuan
Abstract
This paper studies counterfeiting of bank notes in a monetary model under competitive search. The application of the refinement scheme proposed by Guerrieri et al. (2010) shows that there is no equilibrium with counterfeiting. However, due to the entry margin, counterfeiting poses a threat to the existence of a monetary equilibrium: there is no monetary equilibrium if the cost of producing counterfeits is low enough. Moreover, the threat of counterfeiting can generate an endogenous resalability constraint. An extension of the model is provided which allows the threat of counterfeiting to materialize, in that some buyers cannot observe the offers, and therefore search randomly. Counterfeit notes are produced by those buyers who randomly search.

Suggested Citation

  • Shao, Enchuan, 2014. "The threat of counterfeiting in competitive search equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 168-185.
    • Handle: RePEc:eee:dyncon:v:47:y:2014:i:c:p:168-185
    DOI: 10.1016/j.jedc.2014.07.016
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    1. Edward J. Green & Warren E. Weber, 1996. "Will the new $100 bill decrease counterfeiting?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 20(Sum), pages 3-10.
    2. Shao Enchuan, 2009. "Money and Barter under Private Information," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-38, February.
    3. Nosal, Ed & Wallace, Neil, 2007. "A model of (the threat of) counterfeiting," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 994-1001, May.
    4. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, January.
    5. Ennis, Huberto M., 2008. "Search, money, and inflation under private information," Journal of Economic Theory, Elsevier, vol. 138(1), pages 101-131, January.
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    7. Briana Chang, 2011. "Adverse Selection and Liquidity Distortion in Decentralized Markets," Discussion Papers 1513, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    8. Ricardo Cavalcanti & Ed Nosal, 2011. "Counterfeiting as Private Money in Mechanism Design," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 625-636, October.
    9. Veronica Guerrieri & Robert Shimer & Randall Wright, 2010. "Adverse Selection in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 78(6), pages 1823-1862, November.
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    11. Wallace, Neil, 2010. "The Mechanism-Design Approach to Monetary Theory," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 1, pages 3-23, Elsevier.
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    13. Briana Chang, 2011. "Adverse Selection and Liquidity Distortion in Decentralized Markets," 2011 Meeting Papers 157, Society for Economic Dynamics.
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    16. Shao, Enchuan & Fung, Ben S.C., 2016. "Counterfeit quality and verification in a monetary exchange," Economic Modelling, Elsevier, vol. 52(PA), pages 13-25.
    17. Delacroix, Alain & Shi, Shouyong, 2013. "Pricing and signaling with frictions," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1301-1332.
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    21. repec:oup:restud:v:79:y::i:3:p:1209-1238 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Van Hove, Leo, 2015. "Modelling banknote printing costs: of cohorts, generations, and note-years," Economic Modelling, Elsevier, vol. 46(C), pages 238-249.
    2. Charles M. Kahn & Francisco Rivadeneyra & Tsz-Nga Wong, 2018. "Should the Central Bank Issue E-money?," Staff Working Papers 18-58, Bank of Canada.
    3. Pedro Gomis-Porqueras & Timothy Kam & Christopher Waller, 2017. "Nominal Exchange Rate Determinacy under the Threat of Currency Counterfeiting," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(2), pages 256-273, April.
    4. Berentsen, Aleksander & McBride, Michael & Rocheteau, Guillaume, 2017. "Limelight on dark markets: Theory and experimental evidence on liquidity and information," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 70-90.
    5. Bajaj, Ayushi, 2018. "Undefeated equilibria of the Shi–Trejos–Wright model under adverse selection," Journal of Economic Theory, Elsevier, vol. 176(C), pages 957-986.
    6. Ehrenfried, Felix & Holzner, Christian, 2019. "Dynamics and endogeneity of firms’ recruitment behaviour," Labour Economics, Elsevier, vol. 57(C), pages 63-84.
    7. Randall Wright & Philipp Kircher & Benoit Julîen & Veronica Guerrieri, 2017. "Directed Search: A Guided Tour," NBER Working Papers 23884, National Bureau of Economic Research, Inc.
    8. Kang, Kee-Youn, 2017. "Counterfeiting, screening and government policy," Journal of Economic Theory, Elsevier, vol. 172(C), pages 26-54.
    9. Shao, Enchuan & Fung, Ben S.C., 2016. "Counterfeit quality and verification in a monetary exchange," Economic Modelling, Elsevier, vol. 52(PA), pages 13-25.
    10. Nathan Viles & Alexandra Rush & Thomas Rohling, 2015. "The Social Costs of Currency Counterfeiting," RBA Research Discussion Papers rdp2015-05, Reserve Bank of Australia.
    11. Jang, Inkee & Kang, Kee-Youn, 2021. "Adverse selection and costly information acquisition in asset markets," Journal of Mathematical Economics, Elsevier, vol. 97(C).

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    More about this item

    Keywords

    Counterfeiting; Competitive search; Partially directed search;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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