Limited commitment, money, and credit

This paper studies limited commitment and adverse selection in an economy i n which private liabilities (inside money I can be used as instruments of i ntertemporal trade. The results suggest that in conjunction with adverse se lection, the limited commitment problem may affect the behavior of intrinsi cally higher quality debtors more severely than loader quality ones. Noneth eless, a credit economy may function better when both problems are present than under limited commitment alone. Adding a fixed amount of money eases f rictions associated with the credit market. (C) 2001 Academic Press.