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Endogenous Market Formation and Monetary Trade: An Experiment

Author

Listed:
  • Gabriele Camera
  • Dror Goldberg
  • Avi WeissBar-Ilan

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 “traveling game” to study the 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 former minimize trade costs through monetary exchange; the latter maximizes overall surplus through nonmonetary exchange. Monetary trade emerges when coordination is problematic, whereas centralized trade emerges otherwise. This shows that to understand the emergence of money it is important to amend standard theory such that the market structure is endogenized.

Suggested Citation

  • Gabriele Camera & Dror Goldberg & Avi WeissBar-Ilan, 2020. "Endogenous Market Formation and Monetary Trade: An Experiment," Journal of the European Economic Association, European Economic Association, vol. 18(3), pages 1553-1588.
    • Handle: RePEc:oup:jeurec:v:18:y:2020:i:3:p:1553-1588.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvz020
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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. Maria Bigoni & Gabriele Camera & Edoardo Gallo, 2025. "Money and Social Exclusion in Networks," Working Papers 25-06, Chapman University, Economic Science Institute.
    6. 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.
    7. repec:cam:camjip:2519 is not listed on IDEAS

    More about this item

    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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