Endogenous Market Formation and Monetary Trade: an Experiment

Date: 2016
By: 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)
URL: http://d.repec.org/n?u=RePEc:chu:wpaper:16-19&r=net
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.
Keywords: endogenous institutions, macroeconomic experiments, matching, coordination, markets, money
JEL: E4 E5 C9 C92
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