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An economy with personal currency: theory and experimental evidence

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Author Info

  • Martin Angerer

    ()

  • Juergen Huber

    ()

  • Martin Shubik

    ()

  • Shyam Sunder

    ()

Abstract

Is personal currency issued by participants sufficient to operate an economy efficiently, with no outside or government money? Sahi and Yao (1989) and Sorin (1996) constructed a strategic market game to prove that this is possible. We conduct an experimental game in which each agent issues her personal IOUs, and a costless efficient clearinghouse adjusts the exchange rates among them so the markets always clear. The results suggest that if the information system and clearing are so good as to preclude moral hazard, any form of information asymmetry, and need for trust, the economy operates efficiently at any price level without government money. These conditions cannot reasonably be expected to hold in natural settings. In a second set of treatments when agents have the option of not delivering on their promises, a high enough penalty for non-delivery is necessary to ensure an efficient market; a lower penalty leads to inefficient, even collapsing, markets due to moral hazard.

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File URL: http://hdl.handle.net/10.1007/s10436-010-0155-5
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Bibliographic Info

Article provided by Springer in its journal Annals of Finance.

Volume (Year): 6 (2010)
Issue (Month): 4 (October)
Pages: 475-509

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Handle: RePEc:kap:annfin:v:6:y:2010:i:4:p:475-509

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Web page: http://www.springerlink.com/link.asp?id=112370

Related research

Keywords: Strategic market games; Government and individual money; Efficiency; Experimental gaming; C73; C91;

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  1. Huber, Juergen & Shubik, Martin & Sunder, Shyam, 2007. "Three Minimal Market Institutions: Theory and Experimental Evidence," Working Papers 27, Yale University, Department of Economics.
  2. Martin G. Kocher & Matthias Sutter, 2004. "The Decision Maker Matters: Individual versus Group Behaviour in Experimental Beauty-Contest Games," Papers on Strategic Interaction 2004-09, Max Planck Institute of Economics, Strategic Interaction Group.
  3. Juergen Huber & Martin Shubik & Shyam Sunder, 2009. "The Value of Fiat Money with an Outside Bank: An Experimental Game," Levine's Working Paper Archive 814577000000000145, David K. Levine.
  4. Matthias Sutter, 2009. "Individual Behavior and Group Membership: Comment," American Economic Review, American Economic Association, vol. 99(5), pages 2247-57, December.
  5. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2003. "Is gold an efficient store of value?," Economic Theory, Springer, vol. 21(4), pages 767-782, 06.
  6. Sorin, Sylvain, 1996. "Strategic Market Games with Exchange Rates," Journal of Economic Theory, Elsevier, vol. 69(2), pages 431-446, May.
  7. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February.
  8. Herbert E. Scarf, 1959. "Some Examples of Global Instability of the Competitive Equilibrium," Cowles Foundation Discussion Papers 79, Cowles Foundation for Research in Economics, Yale University.
  9. Francesco Feri & Bernd Irlenbusch & Matthias Sutter, 2009. "Efficiency Gains from Team-Based Coordination – Large-Scale Experimental Evidence," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2009_14, Max Planck Institute for Research on Collective Goods.
  10. Ronald Bosman & Heike Hennig-Schmidt & Frans Winden, 2006. "Exploring group decision making in a power-to-take experiment," Experimental Economics, Springer, vol. 9(1), pages 35-51, April.
  11. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
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Cited by:
  1. Karim Jamal & Michael Maier & Shyam Sunder, 2012. "Decoupling Markets and Individuals: Rational Expectations Equilibrium Outcomes from Information Dissemination among Boundedly-Rational Traders," Cowles Foundation Discussion Papers 1868, Cowles Foundation for Research in Economics, Yale University.

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