Indivisibilities, lotteries, and monetary exchange

We introduce lotteries (randomized trading) into search-theoretic models of money. In a model with indivisible goods and fiat money, we show goods trade with probability 1 and money trades with probability tau, where tau < 1 iff buyers have sufficient bargaining power. With divisible goods, a nonrandom quantity q trades with probability 1 and, again, money trades with probability where tau < 1 iff buyers have sufficient bargaining power. Moreover, q never exceeds the efficient quantity (not true without lotteries). We consider several extensions designed to get commodities as well as money to trade with probability less than 1, and to illuminate the efficiency role of lotteries. (C) 2002 Elsevier Science (USA).