Money as Minimal Complexity

TL;DR

This paper characterizes minimal complexity mechanisms for commodity exchange, showing that the star mechanism with money is uniquely optimal in terms of trade efficiency and information requirements for large commodity sets.

Contribution

It introduces a formal framework for measuring the complexity of exchange mechanisms and proves the star mechanism's optimality among minimal structures for large commodity sets.

Findings

The star, cycle, and complete graph mechanisms are the only minimal structures for m>3.

The star mechanism uniquely minimizes a weighted sum of complexity measures for large m.

The star mechanism uses money as the sole medium of exchange, simplifying trade processes.

Abstract

We consider mechanisms that provide traders the opportunity to exchange commodity $i$ for commodity $j$, for certain ordered pairs $ij$. Given any connected graph $G$ of opportunities, we show that there is a unique mechanism $M_{G}$ that satisfies some natural conditions of "fairness" and "convenience". Let $\mathfrak{M}(m)$ denote the class of mechanisms $M_{G}$ obtained by varying $G$ on the commodity set $\left\{1,\ldots,m\right\} $. We define the complexity of a mechanism $M$ in $\mathfrak{M(m)}$ to be a certain pair of integers $\tau(M),\pi(M)$ which represent the time required to exchange $i$ for $j$ and the information needed to determine the exchange ratio (each in the worst case scenario, across all $i\neq j$). This induces a quasiorder $\preceq$ on $\mathfrak{M}(m)$ by the rule \[ M\preceq M^{\prime}\text{if}\tau(M)\leq\tau(M^{\prime})\text{and}\pi(M)\leq\pi(M^{\prime}). \] We show that, for $m>3$, there are precisely three $\preceq$-minimal mechanisms $M_{G}$ in $\mathfrak{M}(m)$, where $G$ corresponds to the star, cycle and complete graphs. The star mechanism has a distinguished commodity -- the money -- that serves as the sole medium of exchange and mediates trade between decentralized markets for the other commodities. Our main result is that, for any weights $\lambda,\mu>0,$ the star mechanism is the unique minimizer of $\lambda\tau(M)+\mu\pi(M)$ on $\mathfrak{M}(m)$ for large enough $m$.