Pairwise extension of credit is introduced into the barter-search economy previously analyzed by the author. The penalty for failure to repay a debt is modeled as the end of trading opportunities. Since credit availability makes access to trade more valuable, there may be multiple equilibrium credit limits. Since the credit limit affects the implicit interest rate and the stock of inventories, it is necessary to check the net impact of the credit limit on the incentive to repay. In a calculated example, with lumpy credit availability, multiple equilibria are very common with a greater credit limit associated with a lower implicit interest rate. With smooth credit availability no multiple equilibria were found. Surprisingly, credit can break the no-production equilibrium.

Journal Article Consumer Differences and Prices in a Search Model Get access Peter Diamond Peter Diamond Massachusetts Institute of Technology Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 102, Issue 2, May 1987, Pages 429–436, https://doi.org/10.2307/1885071 Published: 01 May 1987

I. Two consumers, 3. — II. Many consumers, 12. — III. Varying supply price, 20. — IV. Varying marginal utility of income, 22.