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Rate-of-return dominance and efficiency in an experimental economy

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  • Gabriele Camera
  • Charles Noussair
  • Steven Tucker

Abstract

One of the main challenges for monetary economics is to explain the use of assets that are dominated in rate-of-return as media of exchange. We use experimental methods to study how a fiat money might come to be used in transactions when an identically marketable, dividend-bearing asset, a consol, is also available. Our experimental economies, which have an overlapping generations structure, have the property that the only stationary rational expectations equilibria (SREE) require exclusive use of the consol as the medium of exchange. In a baseline treatment, agents use the consol exclusively, as would occur in an SREE. However, in other treatments, we observe episodes of rate-of-return dominance,with consistent use of fiat money as a medium of exchange. The results show that two properties of our economies are associated with the rate of return dominance anomaly. The first is a history of trading with fiat money, prior to the introduction of the consol. The second is the timing of the dividend payment; when the dividend payment follows the execution of trades between generations, hoarding of the consol occurs on the part of the old, who earn dividends by hoarding. In our economies, settling transactions with a dividend-bearing asset does not improve allocations over those resulting from trading with fiat money. Copyright Springer-Verlag Berlin Heidelberg 2003

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 22 (2003)
Issue (Month): 3 (October)
Pages: 629-660

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Handle: RePEc:spr:joecth:v:22:y:2003:i:3:p:629-660

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Keywords: Keywords and Phrases: Experimental overlapping generations model; Monetary equilibrium; Rate of return dominance.; JEL Classification Numbers: C92; E42.;

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Citations

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Cited by:
  1. Frederic Koessler & Charles Noussair & Anthony Ziegelmeyer, 2007. "Information Aggregation and Beliefs in Experimental Parimutuel Betting Markets," Jena Economic Research Papers 2007-033, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  2. Dror Goldberg, 2012. "The tax-foundation theory of fiat money," Economic Theory, Springer, vol. 50(2), pages 489-497, June.
  3. Vernon L. Smith, 2003. "Constructivist and Ecological Rationality in Economics," American Economic Review, American Economic Association, vol. 93(3), pages 465-508, June.
  4. David Andolfatto, 2005. "On the Coexistence of Money and Bonds," 2005 Meeting Papers 9, Society for Economic Dynamics.
  5. Deck, Cary A. & McCabe, Kevin A. & Porter, David P., 2006. "Why stable fiat money hyperinflates: Results from an experimental economy," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 471-486, November.
  6. John Duffy & Daniela Puzzello, 2014. "Gift Exchange versus Monetary Exchange: Theory and Evidence," American Economic Review, American Economic Association, vol. 104(6), pages 1735-76, June.
  7. Valev, Neven T., 2010. "The hysteresis of currency substitution: Currency risk vs. network externalities," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 224-235, March.
  8. John Duffy, 2008. "Macroeconomics: A Survey of Laboratory Research," Working Papers 334, University of Pittsburgh, Department of Economics, revised Jun 2014.
  9. Daniela Puzzello & Brit Grosskpof & John Duffy, 2011. "Gift Exchange versus Monetary Exchange: Experimental Evidence," 2011 Meeting Papers 1153, Society for Economic Dynamics.

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