Emergence of Money as a Medium of Exchange: An Experimental Analysis

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9507968 Duffy One of the most important conventions a society develops is the acceptance of at least one object as a "medium of exchange". An object becomes a medium of exchange in a community when many agents who have no interest in that object for their own consumption or use in production nevertheless accept the object in trade with the rational expectation that they will be able to trade it for goods which are of intrinsic value to themselves. The challenge to monetary theorists is to identify the factors that determine which object(s) will acquire the status of a medium of exchange. The objective of this project is to construct an experiment analysis of the Kiyotaki-Wright model, the only model of money that can explain without relying on legal restrictions why certain goods that have relatively high storage costs or are dominated in rate of return can nevertheless serve as media of exchange. Kiyotaki and Wright only provide a characterization of the stationary equilibria of their model. They do not provide any account of how a commodity emerges as a medium of exchange. One purpose of this experiment, therefore, is to test whether individuals placed in the Kiyotaki-Wright environment learn over time to adopt the same commodities as exchange media as the model implies will be so used in equilibrium. In this way the experiment will be a test of the robustness of the equilibrium predictions to dynamics created by out-of-equilibrium play. There is a large class of important economic models that share with the Kiyotaki-Wright model the properties that they are dynamic games with strategic complementarities. A second goal of the experiment is to provide a body of empirical observations on the evolution of play in a simple game having these properties so that we will have an empirical basis for modeling the learning dynamics evoked by such environments. Such models of learning dynamics can then be compared with models based upon the study of games with strategic complementarities tha t do not have an explicitly dynamic payoff structure.