This paper adopts mechanism design to investigate the coexistence of fiat money and higher-return assets. We consider an economy with pairwise meetings where fiat money and risk-free capital compete as means of payment, as in . The trading mechanism in pairwise meetings is chosen among all individually rational, renegotiation-proof mechanisms to maximize society's welfare. We show that in any stationary monetary equilibrium capital commands a higher rate of return than fiat money.
- Pairwise trades
- Rate-of-return dominance