Noisy Signals and Unsophisticated Players in a Coordination Model of a Barter Economy

We apply a noisy signal approach (Morris and Shin, 1998, 2001) to the search model of a barter economy (Diamond, 1982), whose equilibria is equilibrium with and without production. Even under the existence of noisy signals, it is difficult to eliminate multiple equilibria in general because, to obtain a productive equilibrium, the individual who observes the highest value of the noisy signal must produce. Further, we investigate the role of unsophisticated traders who neglect the strategic interactions among players. We consider two types of unsophisticated players: the Bayesian traders who react to their estimates of the state of the economy given noisy signals, and the simple-minded traders who neglect the requirement that their product must be exchanged with others. The existence of the unsophisticated traders may facilitate rather than prevent the realization of a productive equilibrium. Government interventions may also have some pump-priming effects.