Abstract
How beneficial is a fully recognizable money to the economy? This paper answers this question for the commodity money system. We build a model in which money is made of precious metal coins, yet its intrinsic quality is imperfectly recognizable by sellers. Based on historical evidence, we allow buyers to resort to a fixed cost coin certification technology - known as coin assaying - that fully reveals the quality of coins to sellers. We show that the two inefficiencies associated with imperfectly recognizable commodity money. Lower quantities traded or lower trading frequencies. are reduced thanks to this technology. We characterize pure and mixed strategy equilibria in which agents certify their coins, and show that certification coexists as a pure strategy equilibrium with the low-quantity inefficiency but does not coexist with the low-frequency inefficiency. The coin inspection technology is welfare improving when it removes the low-frequency inefficiency, but welfare deteriorating when it removes the low-quantity inefficiency.
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