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Endogenous Market Formation and Monetary Trade: an Experiment

Author

Listed:
  • Gabriele Camera

    (Chapman University and University of Basel)

  • Dror Goldberg

    (The Open University of Israel)

  • Avi Weiss

    (Bar-Ilan University and Taub Center for Social Policy Research of Israel and IZA)

Abstract

The theory of money assumes decentralized bilateral exchange and excludes centralized multilateral exchange. However, endogenizing the exchange process is critical for understanding the conditions that support the use of money. We develop a “travelling game” to study the spontaneous emergence of decentralized and centralized exchange, theoretically and experimentally. Players located on separate “islands” can either trade locally, or pay a cost to trade elsewhere, so decentralized and centralized markets can both emerge in equilibrium. The latter maximize trade meetings and are socially efficient; the former minimize trade costs through the use of money. In the laboratory, centralized exchange more frequently emerges when subjects perform diversified economic tasks, but also when they interact in large groups. This shows that to understand the emergence of money it is important to amend the theory of money such that the market structure is endogenized.

Suggested Citation

  • Gabriele Camera & Dror Goldberg & Avi Weiss, 2016. "Endogenous Market Formation and Monetary Trade: an Experiment," Working Papers 16-19, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:16-19
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    References listed on IDEAS

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    1. John Duffy & Daniela Puzzello, 2022. "The Friedman Rule: Experimental Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(2), pages 671-698, May.
    2. Rud, Olga A. & Rabanal, Jean Paul & Sharifova, Manizha, 2019. "An experiment on the efficiency of bilateral exchange under incomplete markets," Games and Economic Behavior, Elsevier, vol. 114(C), pages 253-267.
    3. Gabriele Camera, 2024. "Introducing New Forms of Digital Money: Evidence from the Laboratory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(1), pages 153-184, February.
    4. Gabriele Camera & Lukas Hohl & Rolf Weder, 2023. "Inequality as a barrier to economic integration? An experiment," Experimental Economics, Springer;Economic Science Association, vol. 26(2), pages 383-411, April.
    5. Adamson, Jordan, 2021. "Agglomeration and the extent of the market: Theory and experiment on spatially coordinated exchange," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 838-850.

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    More about this item

    Keywords

    endogenous institutions; macroeconomic experiments; matching; coordination; markets; money;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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