Playing with Money

Abstract

Experimental work in monetary economics is usually based on theory that incorporates an infinite horizon. Yet, hard constraints on laboratory sessions lead to finite times when the game must (with probability 1) end, and then simple backward induction implies monetary equilibria cannot exist. Hence, these experiments cannot evaluate subjects' ability to settle on the use of money as a medium of exchange, that ameliorates trading frictions, as an equilibrium outcome. To address this, we present some finite-horizon games where monetary exchange is an equilibrium outcome, and report some experimental results using these games.

Coordination over a unique medium of exchange under information scarcity

“…The only feedback that they got at each iteration of the game was whether the exchange was successful. Also, contrary to recent experimental studies (Duffy and Puzzello, 2014;Anbarci et al, 2015;Ding et al, 2018;Jiang and Zhang, 2018;Davis et al, 2019;Rietz, 2019), there is no monetary authority, and money emerges endogenously since no good is intrinsically devised to become a medium of exchange.…”

“…Let us note that in recent literature, numerous questions have been treated through an experimental money-emergence paradigm: Whether a convergence on a money equilibria is preferred to a gift exchange equilibria, where an agent has the possibility to give a good in the hope of obtaining another later (Duffy and Puzzello, 2014), how inflation tax affects economic activity (Anbarci et al, 2015), how a foreign money may be accepted by agents in an international framework (Jiang and Zhang, 2018;Ding et al, 2018), how a monetary equilibrium is reachable under assumption of a finite horizon (Davis et al, 2019), or even how when a first money already circulates in the economy, a second may emerge (Rietz, 2019). However, either they assume a central authority that injects money (Anbarci et al, 2015;Ding et al, 2018), either money does not emerge endogenously, as a fraction of agents is first provided with tokens (worthless goods that none agents consume) they are compelled to exchange to obtain their consumption good (Duffy and Puzzello, 2014;Jiang and Zhang, 2018;Davis et al, 2019;Rietz, 2019). In these experiments, the cognitive requirements for money emergence as an endogenous process are thus never explicitly tested.…”

Is Money Essential? An Experimental Approach

“…The main departures include production by Player 3 in Model 1 and production by Players 2 and 3 in Model 2 without money. 11 Given that production in Model 1 is significantly different from zero, one may wonder whether other-regarding preferences could play a role. To test this, we re-ran the regressions including subjects' scores from social value orientation,  , as a control,…”

“…Given this, we follow earlier work in which some of us were involved (Davis et al 2020) by using models where monetary equilibria exist even if   ∞, and, in fact, we use models with  = 2 periods. The insight that monetary equilibria are possible in finite environments is not new: our approach is closely related to the discussion of money in Kovenock and Vries (2002), somewhat related to the discussion of bubbles in or Allen and Gorton (1993), and ultimately related to discussions like Samuelson (1987) of how lack of common knowledge about the final period ameliorates end-game effects.…”

“…Yet another difference is that we sometimes offer subjects suggestions about strategies. The idea is that the multiplicity of equilibria leads to a coordination problem: agents may settle on the inferior nonmonetary equilibrium even if mone- 2 To be clear, Davis et al (2020) take a finite horizon model into the lab, but there are many differences: (i) We adopt a mechanism design perspective. (ii) We study whether recommendations (see below) affect equilibrium selection.…”