Charles M. Kahn, James McAndrews, and William Roberds
Working Paper 2004-18
August 2004
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An extensive literature in monetary theory has emphasized the role of money as a record-keeping device. Money assumes this role in situations where using credit would be too costly, and some might argue that this role will diminish as the cost of information, and thus the cost of credit-based transactions, continues to fall.
In this paper we investigate another use for money: the provision of privacy. That is, a money purchase does not identify the purchaser while a credit purchase does. In a simple trading economy with moral hazard, we compare the efficiency of money is compared with that of credit, and we find that money may be useful even when information is free.
JEL classification: D830, E420, G280
Key words: money, privacy, memory, search
The authors gratefully acknowledge the helpful comments of Akihiko Matsui. They also thank participants in conferences held at the University of Minnesota and the University of Iowa for helpful comments. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to William Roberds, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, NE, Atlanta, Georgia, 404-498-8970, william.roberds@atl.frb.org.