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Reconsidering the Case for Monetary Exchange

The literature on media of exchange has a standard example of indirect exchange being dominated by direct exchange. This case occurs under the assumption of additive transaction costs. Hence, without additional cost assumptions, the agents would prefer direct exchange. From here it is frequently concluded that other costs (or settings e.g. incomplete information) have to be examined in order to explain the use of money. However, the present paper exemplifies that if double coincidences of wants are absent it can be beneficial to introduce money already for additive transaction costs. The additive transaction costs form represents the physical characteristics of goods. Hence, the paper demonstrates that the physical properties of media of exchange matter. We show under what conditions commodity money might emerge and when it will be dominated by fiat money in this setup. Finally we consider the possibility of agent specific transaction costs and resulting trading posts, again we find that a certain fiat money can dominate such arrangement.