Information frictions and market exchange in the digital era – DigitalFric

This research builds on theoretical and methodological approaches in monetary theory that seek to provide microfoundations for liquidity, financial frictions, and the demand for monetary assets (see Lagos, Rocheteau and Wright, 2016, for a survey and a description of the methodology).

Axis 1. The preliminary results of the research conducted in collaboration with Cyril Monnet and Asgerdur Petursdottir show that the introduction of a central-bank account for all or CBDC improves efficiency in market exchange, may reduce risk taking in the banking sector and does not necessarily lead to bank disintermediation. Overall, the introduction of CBDC allows improving social welfare.
Axis 2. The paper “What is the value of being a superhost? Pricing and ratings in search equilibrium” has been written in collaboration with Aleksander Berentsen and Christopher Waller. In this paper we construct a directed search model of the product market where sellers produce an experience good, whose value is correlated across buyers and where buyers can rate sellers. The model captures the incentives of sellers to subsidize experimentation and the reward to acquire a good reputation. We show that unrated sellers charge a low price to attract buyers, highly rated sellers post a high price and sell with a higher probability than unrated sellers, and that welfare is higher with a ratings system. Our model is consistent with Airbnb data, that shows that Superhosts charge higher prices and have a higher occupancy rate and higher revenue than non-Superhosts.

The main objective to follow in the next stage of this project is to study the effects of the issuance of central-bank digital currencies on the implementation of monetary policy and financial stability.

«What is the value of being a superhost? Pricing and ratings in search equilibrium«. Working Paper 2019-019A by Aleksander Berentsen, Mariana Rojas Breu, and Christopher J. Waller: research.stlouisfed.org/wp/more/2019-019

The general objective of DIGITALFRIC is to understand how new information and communication technologies may affect market exchange, access to credit and ultimately social welfare. To this aim the project is divided into two principal axes subdivided in specific research topics. Each of these topics will be studied from a theoretical standpoint using available data to support the theoretical findings.
The objective of Axis 1 is to provide a rigorous analysis of the potential effects of the issuance of digital currencies by the central banks. The classic issue of the competition between central-bank issued money and privately-issue money requires deep reexamination once central-bank digital currencies (CBDC) become technically feasible. Important economic consequences could derive from the provision of CBDC. The adoption of CBDC can alter the functioning of market exchange through the payments system, the access to credit, the role of financial intermediation and the stability of the financial system. Yet research on this nascent topic is currently scarce. DIGITALFRIC will provide an assessment of the competition between privately-issued money and central-bank digital money and its implications in terms of social welfare. To address this main objective, this axis is divided into three topics, each of them focused on a specific outstanding economic issue. The first topic consists in the study of potentially non-anonymous outside money provided by the central bank, a speculation that becomes relevant once central banks can provide digital currency. An analysis in terms of the costs and benefits of eliminating the anonymity attached to central-bank money will be provided. The second topic relates to the effects of the provision of digital currencies by central banks on financial stability and the operational frameworks of monetary policy, and the resulting impact on social welfare. The third topic consists in the analysis of the role of monetary assets as units of account, in particular for debt contracts, and its implications in terms of the design of optimal monetary policy. A key research question is how the unit-of-account role of outside money can be altered by the adoption of CBDC.
The objective of Axis 2 is to study current transformations in financial and goods markets that are made possible by the use of internet and are deemed to considerably alter the exchange process. This axis is divided into two topics. The first topic consists in the study the role of online ratings in the goods markets. DIGITALFRIC will provide a theoretical assessment on how ratings affect the price setting behavior of sellers in online markets and market’ tightness across submarkets where sellers display heterogeneous qualities. The theoretical predictions will be tested by exploiting a database on an online market for rentals. Second, this project will study the potential of the use of crowdfunding for the productive sector. The analysis will focus on the potential of crowdfunding as a source of funds for small and medium firms in Latin America. DIGITALFRIC will make a double contribution to existing research, focused on crowdfunding in developed countries. First, this project will theoretically assess the limits and benefits of crowdfunding as a source of funding in volatile macroeconomic contexts. Second, data on the use of crowdfunding in Latin American countries will be gathered and analyzed to make an important empirical contribution that allows identifying the specific role of crowdfunding in developing countries.