Ted Temzelides

Directed Matching and Monetary Exchange

We develop a model of monetary exchange where, as in the random matching literature, agents trade bilaterally and not through centralized markets. Rather than assuming they match exogenously and at random, however, we determine who meets whom as part of the equilibrium. We show how to formalize this process of directed matching in dynamic models with double coincidence problems, and present several examples and applications that illustrate how the approach can be used in monetary theory. Some of our results are similar to those in the random matching literature; others differ significantly. Copyright Econometric Society, 2002.

A dynamic model of settlement

We investigate the role of settlement in a dynamic model of a payment system where the ability of participants to perform certain welfare-improving transactions is subject to random and unobservable shocks. In the absence of settlement, the full information first-best allocation cannot be supported due to incentive constraints. In contrast, this allocation is supportable if settlement is introduced. This, however, requires that settlement takes place with a sufficiently high frequency.

Matching and Money

In Corbae, Temzelides, and Wright (2001) (hereafter, CTW) we proposed a new version of the framework that uses bilateral matching to model the exchange process, and in particular to model the use of money as a medium of exchange. Our version does not have agents meeting exogenously and at random, but rather has agents meeting endogenously. That is, agents are matched at each date subject to a stability condition that requires, roughly, that no agents prefer to be paired with each other or to be unmatched, rather than to be paired with the partners they get along the equilibrium path. While similar in spirit to the cooperative matching concept introduced by David Gale and Lloyd Shapley (1962), we had to generalize their framework to dynamic models because we are interested in monetary economics. Here we present a version of the solution concept in CTW, specialized in some ways but also generalized to include extrinsic uncertainty (sunspots). We then discuss some applications of endogenous matching models to issues that have previously been addressed using random matching, including the existence of sunspot equilibria and the efficiency of inside versus outside money. One of our main goals is to show how endogenous matching is a useful alternative to random matching. This may be interesting to those who think that bilateral trade is a reasonable friction upon which to build a theoretical foundation for monetary economics but perhaps think that random matching is an extreme and unrealistic simplification. Another goal is to provide examples where it makes a difference for substantive results how we model the matching process, and also examples where it does not. I. Endogenous Matching

Payments Systems Design in Deterministic and Private Information Environments

Abstract The first setup we study is a deterministic model with spatial separation where we consider alternative payments systems institutions and their implications for allocation and welfare. A payments system with period-by-period settlement in outside money improves on decentralized exchange. An efficient allocation is supported by a payments system where settlement is not imposed. In the second model, there is random matching and unobserved productivity shocks and preference shocks. We explore how risk should be shared optimally in this economy and interpret the results in terms of how actual payments systems should operate. Journal of Economic Literature Classification Numbers: E4, E5.

Competitive Behavior in Market Games: Evidence and Theory

We explore whether competitive outcomes arise in an experimental implementation of a market game, introduced by Shubik (1973) [21]. Market games obtain Pareto inferior (strict) Nash equilibria, in which some or possibly all markets are closed. We find that subjects do not coordinate on autarkic Nash equilibria, but favor more efficient Nash equilibria in which all markets are open. As the number of subjects participating in the market game increases, the Nash equilibrium they achieve approximates the associated competitive equilibrium of the underlying economy. Motivated by these findings, we provide a theoretical argument for why evolutionary forces can lead to competitive outcomes in market games.

On the Local Interaction of Money and Credit

We study the coexistence of monetary and credit transactions in a model where exchange is decentralized. Agents belong to different locations which are informationally separated. The equilibrium mix of monetary and credit transactions is characterized as a function of the frequency of meetings among agents from different locations, Credit transactions take place only among a small set of neighbors. Monetary trades emerge only if interactions with faraway locations are sufficiently frequent. Even in that case, trades among nearby locations remain non-monetized. (Copyright: Elsevier)

Private money, settlement, and discounts

Abstract We construct a random matching model to study the effects of clearing arrangements for private money on the prices at which private monies trade, the volume of exchange, and welfare. In a model with full information, clearing arrangements eliminate discounts on private monies issued in other locations, the volume of exchange increases, and welfare increases. However, with private information about the quality of non-local monies, clearing arrangements may discourage the circulation of high-quality monies, and there may exist welfare-dominated equilibria with low-quality monies.

An Uncertainty Principle for Social Science Experiments

We provide a model of the experimental process in the social sciences by adapting the symbolism developed for modeling experiments in atomic physics. Meaningful measurements are represented by operators that obey a non-commutative algebra. Thus, the order in which the experimenter attempts to extract information about two distinct attributes matters. In addition, responses to questions about an attribute depend on whether the experimenter has previously attempted to extract information about another attribute. The act of measurement forces the subject to reveal one value of the attribute, which is an eigenvalue of the operator associated with the measurement. Prior to this, one can only talk about the probability that the measurement will lead to any particular value. An uncertainty principle imposes a fundamental limit on the observers ability to extract detailed information about two distinct attributes within a short period of time.

Robust dynamic energy use and climate change

We study a dynamic stochastic general equilibrium model in which agents are concerned about model uncertainty regarding climate change. An externality from greenhouse gas emissions damages the economys capital stock. We assume that the mapping from climate change to damages is subject to uncertainty, as opposed to risk, and we use robust control to study efficiency and optimal policy. We obtain a sharp analytical solution for the implied environmental externality and characterize dynamic optimal taxation. The optimal tax that restores the socially optimal allocation is Pigouvian. We study optimal output growth in the presence and in the absence of concerns about model uncertainty, and find that these can lead to substantially different conclusions regarding the optimal emissions and the optimal mix of fossil fuel. In particular, the optimal use of coal will be significantly lower on a robust path, while the optimal use of oil/gas will edge down.

Endogenous Dynamic Matching and Fashion

We study bilateral matching under private information about agents characteristics. Assortative matching is assumed to maximize total welfare and is the only equilibrium outcome in the absence of private information. When an information friction is present, the matching process can be improved if a payoff-irrelevant (sunspot) variable which we term fashion is introduced. Informed agents choose to adopt fashion as a signaling device. If success in matching is observed, other agents can imitate the signal. Thus, for fashion to be useful, it must constantly change. If there are more than two types of agents, both high fashion and low fashion are needed to facilitate efficiency in matching.