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The political economy of Bitcoin

Posted by
December 10, 2014
in Blog

I have a new paper with Joshua Hendrickson and co-blogger Thomas Hogan titled The Political Economy of Bitcoin. Here’s the abstract:

The recent proliferation of bitcoin has been a boon for users but might pose problems for governments. Indeed, some governments have already taken steps to ban or discourage the use of bitcoin. In a model with endogenous matching and random consumption preferences, we find multiple monetary equilibria including one in which bitcoin coexists with regular currency. We then identify the conditions under which government transactions policy might deter the use of bitcoin. We show that such a policy becomes more difficult if some users strictly prefer bitcoin because they can avoid other users holding currency in the matching process.

File this under shameless self-promotion. The paper follows up on some of my earlier work on bitcoin (see here, here, and here). We also employ a model developed by Thomas Hogan and me, which adds an element of randomness to the existing endogenous matching model.

I’ve been thinking about the role government’s play in determining the commonly accepted medium of exchange for a while now. Alex Salter and I summarize the important issues. My earlier work on Somalia with Lawrence H. White addresses one aspect of the problem: whether government is necessary to perpetuate an existing unbacked (or fiat) money. The recent experience of bitcoin suggests government is not necessary for an unbacked money to emerge either, though the process of emergence is perhaps a bit messier than is indicated by most modern search-theoretic models of money.

There is still much to be said about the political economy of bitcoin in particular and the role governments play in determining media of exchange more generally. Nonetheless, we hope to have advanced the conversation a bit with our paper.