Is Money Essential? An Experimental Approach

Abstract

Monetary theorists say money is essential if more desirable outcomes are incentive feasible when money is available. We develop two models: one where frictions make money essential; one where they do not. Then we study them experimentally. Unlike past work, money can be valued with finite horizons, crucial because that is necessary in the lab. Also different from past experiments, we make suggestions about strategies -e.g., "accept money"that subjects may follow, or not, especially if they are incentive incompatible. Results are largely consistent with theory, with some anomalies that we investigate using measures of social preferences and exit surveys.

The Friedman Rule: Experimental Evidence

“…Jiang et al. (2021a) also study the essentiality of money in finite‐horizon environments. They show that production rates and efficiency are higher when monetary exchange is an equilibrium.…”