Playing with money

How long is forever in the laboratory? Three implementations of an infinite-horizon monetary economy

“…Even in the last sequence of the RT and BRT, where the recruitment time constraint could be more binding, the negative trend in output and the positive trend in inflation are still mild. This contrasts with the finite-economy setup in McCabe (1989) and Davis et al (2020) where, when the theory predicts that money should not be valued, the value of money sharply decreases as the subjects gain experience in observing the end of a horizon. In terms of treatment differences between the three implementation schemes, the recruitment time constraint seems to affect the last sequence relative to earlier sequences in the RT and BRT.…”

“…In our design, the subjects are informed about the exact number of periods they will play the game. Davis et al (2020) criticize experiments that rely on the implementation of infinitehorizon settings on the same grounds as Selten et al (1997). As a result, they explore the implementation of finite-horizon monetary models that are immune to critiques against experiments that are based on these models.…”

“…The credibility issues associated with RT are especially pertinent for experimental monetary economics. First, this could jeopardize the existence of monetary equilibria where fiat money is valued (a concern voiced by Davis et al 2020). In view of the limited recruitment time for a session, subjects should expect that fiat money will become useless when the session concludes.…”

“…Davis et al (2020) evaluate the role of money in a treatment with a finite-horizon game, followed by a hawk-dove game (unrelated to the money game) to circumvent the backward induction issue. They find a similar result that subjects fail to connect the two games.…”

The Friedman Rule: Experimental Evidence

“…Davis et al. (2020) study finite‐horizon environments with and without fiat money. They study how fiat money affects allocations both in environments where monetary exchange is an equilibrium and where it is not.…”