Coincidence of wants
The coincidence of wants problem (often "double coincidence of wants") is an important category of transaction costs that impose severe limitations on economies lacking money and thus dominated by barter or other in-kind transactions. The problem is caused by the improbability of the wants, needs or events that cause or motivate a transaction occurring at the same time and the same place. One example is the bar musician who is "paid" with liquor or food, items which his landlord will not accept as rent payment, when the musician would rather have a month's shelter. If, instead, the musician's landlord were to throw a party and desire music for it, hiring the musician to play it by offering the month's rent in exchange, a double coincidence of wants would exist.
In-kind transactions have several limitations, most notably timing constraints. If you wish to trade fruit for wheat, you can only do this when the fruit and wheat are both available at the same time and place (and, additionally, only if someone wishes to trade wheat for fruit). That may be a very brief time, or it may be never. With money, (or any commodity used as a medium of exchange) you can sell your fruit when it is ripe and take the money; then use the money to buy wheat when it is harvested. Thus money makes all commodities more liquid.
Besides barter, other kinds of in-kind transactions also suffer from the coincidence of wants problem in the absence of money. For example, when wealth is transferred during marriage, divorce, inheritance, and other crucial life events, or during the collection of taxes or tribute, it is improbable that this event will coincide with the recipient's desire for the commodities the payer can readily obtain, unless they are intermediate commodities, i.e. money. In the absence of money, all of these transactions suffer from the basic problem of barter – they require an improbable coincidence of wants and events.
- W.S. Jevons (1875), Money and the Mechanism of Exchange, Chapter 1, paragraphs 5-6. London: Macmillan.
- Carl Menger, "On the Origin of Money"
- Nobuhiro Kiyotaki and Randall Wright (1989), 'On money as a medium of exchange', "Journal of Political Economy" 97, pp. 927-54.