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The Value of Fiat Money with an Outside Bank: An Experimental Game

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Author Info
Juergen Huber (University of Innsbruck)
Martin Shubik () (Cowles Foundation, Yale University)
Shyam Sunder (Yale University)

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Abstract

Why people accept intrinsically worthless fiat money in exchange for real goods and services has been a longstanding puzzle in economics. Attempts to explain the broad acceptance of fiat money have relied on either assuming that someone will exchange the fiat money for real consumption at the end of the horizon, or on pushing the puzzle of fiat money into infinite future in overlapping generations settings. We examine an alternative route that can explain the value of fiat money through a debt instrument which allows consumption to be moved backward in time. In this paper, we present empirical evidence that the theoretical predictions about the behavior of such economies work reasonably well in a laboratory experiment. The invention of fiat money and related debt instruments allow society to replace expensive commodities by costless paper and cut the dead weight loss associated with the former.

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File URL: http://cowles.econ.yale.edu/P/cd/d16b/d1675.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1675.

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Length: 35 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:cwl:cwldpp:1675

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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Related research
Keywords: Experimental Gaming; Bank; Fiat money;

Other versions of this item:

Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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References listed on IDEAS
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.:
  1. Huber, Juergen & Shubik, Martin & Sunder, Shyam, 2007. "Three Minimal Market Institutions: Theory and Experimental Evidence," Working Papers 27, Yale University, Department of Economics. [Downloadable!]
  2. Juergen Huber & Martin Shubik & Shyam Sunder, 2007. "Three Minimal Market Institutions with Human and Algorithmic Agents: Theory and Experimental Evidence," Cowles Foundation Discussion Papers 1623, Cowles Foundation, Yale University, revised Jun 2009. [Downloadable!]
  3. Hahn, F H, 1971. "Equilibrium with Transaction Costs," Econometrica, Econometric Society, vol. 39(3), pages 417-39, May. [Downloadable!] (restricted)
  4. Ioannis Karatzas & Martin Shubik & William Sudderth & John Geanakoplos, 2006. "The inflationary bias of real uncertainty and the harmonic Fisher equation," Economic Theory, Springer, vol. 28(3), pages 481-512, 08. [Downloadable!] (restricted)
  5. Martin Shubik, 1978. "The Capital Stock Modified Competitive Equilibrium," Cowles Foundation Discussion Papers 507, Cowles Foundation, Yale University. [Downloadable!]
  6. 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. [Downloadable!] (restricted)
  7. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June. [Downloadable!] (restricted)
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