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Endogenous Market Formation and Monetary Trade: an Experiment

Author

Listed:
  • Gabriele Camera

    (Economic Science Institute, Chapman University & University of Bologna)

  • Dror Goldberg

    (The Open University of Israel)

  • Avi Weiss

    (Bar-Ilan University & Taub Center for Social Policy Studies in Israel)

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 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. Theformerminimizetradecoststhroughmonetaryexchange; thelattermaximizesoverall surplus through non-monetary exchange. Monetary trade emerges when coordination is problematic, while 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 Weiss, 2019. "Endogenous Market Formation and Monetary Trade: an Experiment," Working Papers 19-04, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:19-04
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/261/
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    References listed on IDEAS

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    4. 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.
    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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