DP8184 Communal Responsibility and the Coexistence of Money and Credit Under Anonymous Matching

Author(s): Lars Boerner, Albrecht Ritschl
Publication Date: January 2011
Keyword(s): anonymous matching, bills of exchange, Communal responsibility, money and credit demand
JEL(s): D51, E41, N2
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8184

Communal responsibility, a medieval institution studied by Greif (2006), supported the use of credit among European merchants in the absence of modern enforcement technologies. This paper shows how this mechanism helps to overcome enforcement problems in anonymous buyer/seller transactions. In a village economy version of the Lagos and Wright (2005) model, agents trading anonymously in decentralized markets can be identified by their citizenship and thus be held liable for each other. Enforceability within each village's centralized afternoon market ensures collateralization of credit in decentralized markets. In the resulting equilibrium, money and credit coexist in decentralized markets if the use of credit is costly. Our analysis easily extends itself to other payment systems like credit cards that provide a group identity to otherwise anonymous agents.