Published online by Cambridge University Press: 10 June 2016
We build a model of search and matching in which agents trade using coins that are imperfectly recognizable, but have access to a coin inspection technology—known as coin assaying—that reveals the intrinsic content of coins for a fee. We consider two sources of imperfect information: counterfeit coins and clipping. With counterfeits, coin assaying reduces the extent of inefficiencies associated with imperfect recognizability of coins (namely lower traded quantities and lower trading frequencies). Yet coin assaying does not necessarily increase welfare, because it unmasks counterfeits that then trade at a discount, reducing total output. With clipping, we show that agents clip for two reasons: in the hope of passing an inferior coin for a superior one, and to reduce the purchasing power of coins that are too valuable. Although coin assaying could remove the first type of clipping, it had no effect on the second.
We would like to thank Nejat Anbarci, Aleksander Berentsen, Régis Breton, Gabriele Camera, Jean Cartelier, Bertrand Gobillard, Ian King, Robert King, Guillaume Rocheteau, Mariana Rojas Breu, Isabel Schnabel, Pasquale Sgro, Brian Silverstone, Ching-jen Sun, Nathan Sussman, Warren Weber, and Randall Wright for helpful comments. In addition, we thank the audience at the ASSA meeting in New Orleans, the Bernoulli Center for Economics in Basel, the Cleveland FED, the European Workshop on Monetary Theory in Paris, the Symposium on Money and Banking in Strasbourg, the Southern Workshop in Macroeconomics in Auckland, and the Universities of Paris and Waikato. The opinions expressed here are those of the authors and should not be interpreted as necessarily those of the Banque de France, the Eurosystem, or the OECD. All remaining errors are our own.