Gift Exchange versus Monetary Exchange: Theory and Evidence

Abstract

We study the Lagos and Wright (2005) model of monetary exchange in the laboratory. With a finite population of sufficiently patient agents, this model has a unique monetary equilibrium and a continuum of non-monetary gift exchange equilibria, some of which Pareto dominate the monetary equilibrium. We find that subjects avoid the gift exchange equilibria in favor of the monetary equilibrium. We also study versions of the model without money where all equilibria involve non-monetary gift exchange. We find that welfare is higher in the model with money than without money, suggesting that money plays a role as an efficiency enhancing coordination device. ( JEL C92, D12, E40, Z13)

Experimental Evidence on the Essentiality and Neutrality of Money in a Search Model

“…We also explore the reverse transition from a monetary world to a nonmonetary world. Here our main experimental finding is that economies that start off without a token (money) object coordinate on low-welfare gift-exchange equilibria, as we previously observed in Duffy and Puzzello (2014). The surprise introduction of a token (money) object midway through the experiment, however, does not increase exchange or raise welfare; instead, exchange and welfare remain low relative to the first best even after the token object is introduced, though subjects do use the token object in exchange.…”

“…The surprise introduction of a token (money) object midway through the experiment, however, does not increase exchange or raise welfare; instead, exchange and welfare remain low relative to the first best even after the token object is introduced, though subjects do use the token object in exchange. By contrast, if the economy starts out with a fixed supply of the token (fiat money) object, the presence of that object in the economy results in higher amounts of exchange and higher welfare relative to economies without the token object, again consistent with the findings of Duffy and Puzzello (2014). If that token object is removed (again as a surprise) midway through the experiment, the amount of exchange drops precipitously as does the level of welfare.…”

“…Regarding the essentiality of money, the most closely related article is that by Duffy and Puzzello (2014), who also study the Lagos and Wright (2005) model of monetary exchange in the laboratory with a necessarily finite population of subjects (Lagos & Wright, 2005 have an infinite continuum). 3 Given a finite population of sufficiently patient agents, there exists a continuum of nonmonetary gift-exchange equilibria in addition to the monetary equilibrium; these gift-exchange equilibria are supported by a contagious grim-trigger strategy played by the society of agents as a whole (Kandori, 1992).…”

“…In Duffy and Puzzello (2014), we explored whether gift-exchange equilibria could indeed be welfare improving relative to monetary equilibria in a laboratory experiment implementing a version of Lagos and Wright's (2005) search-theoretic model of money. Despite the theoretical possibility that gift-exchange equilibria could achieve higher levels of welfare than the unique monetary equilibrium in the same environment, we found just the opposite: exchange activity and welfare were found to be higher when monetary exchange was possible than under a pure, nonmonetary gift-exchange system.…”

Money and the Scale of Cooperation

“…In particular, this paper is related to our previous experiments about decentralized, fiat monetary systems: Camera and Casari (2014) studies the coordination role of monetary exchange, while studies cooperation with and without money in small and large groups, offering an evolutionary explanation for the use of money. Duffy and Puzzello (2014) also exogenously manipulates group size in reference to a specific monetary model. The endogenous choice of the scale of interaction is an original aspect of the present study, as previous experiments study group formation only without money (Ahn et al, 2009).…”