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1. With barter, trade takes place if we have double coincidences: rVB = a6 (u - c) . With credit, trade takes place if we
1. With barter, trade takes place if we have double coincidences: rVB = a6 (u - c) . With credit, trade takes place if we have double or single coincidences: TVC = 06 (u - c) + dou - doc. For credit to be viable, we must have the incentive constraint: -c+ VC > UVP + (1 -p) Vc, where u is the probability that deviators are caught and punished and VD is the deviation payoff. Assume VD = VB. Compute the upper bound of r such that credit is viable. 2. Now, we introduce fiat money. The Bellman equations are rVo = ab (u - c) + aoM maxT (V1 - Vo - c) and TV1 = ab (u - c) + ao (1 - M) T (u + Vo - V1) . Compute the upper bound of r such that a pure monetary equilibrium exists
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