Rate-of-return dominance and efficiency in an experimental economy
AbstractOne 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
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 22 (2003)
Issue (Month): 3 (October)
Contact details of provider:
Web page: http://link.springer.de/link/service/journals/00199/index.htm
Other versions of this item:
- Noussair, C.N. & Camera , G. & Tucker, S., 2003. "Rate of return dominance and efficiency in an experimental economy," Open Access publications from Tilburg University urn:nbn:nl:ui:12-377947, Tilburg University.
- Camera, G. & Noussair, C. & Tucker, S., 2000. "Rate-of-Return Dominance and Efficiency in an Experimental Economy," Purdue University Economics Working Papers 1135, Purdue University, Department of Economics.
- C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- F30 - International Economics - - International Finance - - - General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- McCabe, Kevin A., 1989. "Fiat money as a store of value in an experimental market," Journal of Economic Behavior & Organization, Elsevier, vol. 12(2), pages 215-231, October.
- Diamond, Peter & Yellin, Joel, 1990. "Inventories and Money Holdings in a Search Economy," Econometrica, Econometric Society, vol. 58(4), pages 929-50, July.
- Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
- Walker, James M, et al, 2000. "Collective Choice in the Commons: Experimental Results on Proposed Allocation Rules and Votes," Economic Journal, Royal Economic Society, vol. 110(460), pages 212-34, January.
- Ramon Marimon & Shyam Sunder, 1993.
"Expectations and learning under alternative monetary regimes: An experimental approach,"
Economics Working Papers
37, Department of Economics and Business, Universitat Pompeu Fabra.
- Marimon, Ramon & Sunder, Shyam, 1994. "Expectations and Learning under Alternative Monetary Regimes: An Experimental Approach," Economic Theory, Springer, vol. 4(1), pages 131-62, January.
- Marimon, R. & Sunder, S., 1993. "Expectations and Learning under Alternative Monetary Regimes: An Experimental Approach," Papers 189, Cambridge - Risk, Information & Quantity Signals.
- Aliprantis, Charalambos D & Plott, Charles R, 1992. "Competitive Equilibria in Overlapping Generations Experiments," Economic Theory, Springer, vol. 2(3), pages 389-426, July.
- Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
- Miguel Sidrauski, 1967. "Inflation and Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 75, pages 796.
- Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
- Freeman, Scott J, 1989. "Fiat Money as a Medium of Exchange," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 137-51, February.
- Bryant, John & Wallace, Neil, 1984. "A Price Discrimination Analysis of Monetary Policy," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 279-88, April.
- Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 207-22, May.
- John Duffy, 1998. "Monetary theory in the laboratory," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 9-26.
- Gardner, Roy & Ostrom, Elinor, 1991. " Rules and Games," Public Choice, Springer, vol. 70(2), pages 121-49, May.
- Jack Ochs & John Duffy, 1999. "Emergence of Money as a Medium of Exchange: An Experimental Study," American Economic Review, American Economic Association, vol. 89(4), pages 847-877, September.
- Joyce, Patrick, 1998. "Demand revelation and tatonnement auctions," Journal of Economic Behavior & Organization, Elsevier, vol. 36(2), pages 163-175, August.
- Townsend, Robert M., 1987. "Asset-return anomalies in a monetary economy," Journal of Economic Theory, Elsevier, vol. 41(2), pages 219-247, April.
- Brunner, Karl & Meltzer, Allan H, 1971. "The Uses of Money: Money in the Theory of an Exchange Economy," American Economic Review, American Economic Association, vol. 61(5), pages 784-805, December.
- Lim, Suk S & Prescott, Edward C & Sunder, Shyam, 1994. "Stationary Solution to the Overlapping Generations Model of Fiat Money: Experimental Evidence," Empirical Economics, Springer, vol. 19(2), pages 255-77.
- Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
- Neil Wallace, 1997. "Absence-of-double-coincidence models of money: a progress report," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-20.
- Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
- Brown, Paul M., 1996. "Experimental evidence on money as a medium of exchange," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 583-600, April.
- Grandmont, Jean-Michel & Younes, Yves, 1972. "On the Role of Money and the Existence of a Monetary Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 355-72, July.
- Hellwig, Martin F., 1993. "The challenge of monetary theory," European Economic Review, Elsevier, vol. 37(2-3), pages 215-242, April.
- Daniela Puzzello & Brit Grosskpof & John Duffy, 2011. "Gift Exchange versus Monetary Exchange: Experimental Evidence," 2011 Meeting Papers 1153, Society for Economic Dynamics.
- Vernon L. Smith, 2003.
"Constructivist and Ecological Rationality in Economics,"
American Economic Review,
American Economic Association, vol. 93(3), pages 465-508, June.
- Smith, Vernon L., 2002. "Constructivist and Ecological Rationality in Economics," Nobel Prize in Economics documents 2002-7, Nobel Prize Committee.
- 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.
- 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.
- David Andolfatto, 2005.
"On the Coexistence of Money and Bonds,"
- John Duffy, 2008. "Macroeconomics: A Survey of Laboratory Research," Working Papers 334, University of Pittsburgh, Department of Economics, revised Mar 2008.
- 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.
- FrÃ©dÃ©ric Koessler & Charles Noussair & Anthony Ziegelmeyer, 2007. "Information Aggregation and Beliefs in Experimental Parimutuel Betting Markets," Papers on Strategic Interaction 2005-12, Max Planck Institute of Economics, Strategic Interaction Group.
- John Duffy & Daniela Puzzello, 2011. "Gift Exchange versus Monetary Exchange: Theory and Evidence," Working Papers 449, University of Pittsburgh, Department of Economics, revised Sep 2013.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.