Why people accept intrinsically worthless fiat money in exchange for real goods and services has been a longstanding question. There are many competing sufficient explanations that may confound each other in practice but can be individually tested in isolation experimentally. In this paper we examine a sufficient explanation of the value of fiat money through the existence of a debt instrument which allows consumption to be moved earlier in time. We present experimental evidence that the theoretical predictions about the behavior of such economies work reasonably well in a laboratory setting. The import of this finding for the theory of money is to show that the presence of a societal bank and default laws provide sufficient structure to support the use of fiat money, although many other institutions such as taxation provide alternatives.
We present a model in which an outside bank and a default penalty support the value of fiat money, and experimental evidence that the theoretical predictions about the behavior of such economies, based on the Fisher-condition, work reasonably well in a laboratory setting. The import of this finding for the theory of money is to show that the presence of a societal bank and default laws provide sufficient structure to support the use of fiat money and use of the bank rate to influence inflation or deflation, although other institutions could provide alternatives.
We define and examine the performance of three minimal strategic market games (sell-all, buy-sell, and double auction) in laboratory relative to the predictions of theory. Unlike open or partial equilibrium settings of most other experiments, these closed exchange economies have limited amounts of cash to facilitate transactions and include feedback. General equilibrium theory, since it abstracts away from market mechanisms and has no role for money or credit, makes no predictions about how the paths of convergence to the competitive equilibrium may differ across alternative mechanisms. Introduction of markets and money as carriers of process creates the possibility of motion. The laboratory data reveal different paths, and different levels of allocative efficiency in the three settings. The results suggest that abstracting away from all institutional details does not help understand dynamic aspects of market behavior. For example, the oligopoly effect of feedback from buying an endowed good is missed. Inclusion of mechanism differences into theory may enhance our understanding of important aspects of markets and money and help link conventional equilibrium analysis with dynamics.
Is personal currency issued by participants sufficient to operate an economy efficiently, with no outside or government money? Sahi and Yao (1989) and Sorin (1996) constructed a strategic market game to prove that this is possible. We conduct an experimental game in which each agent issues her personal IOUs, and a costless efficient clearinghouse adjusts the exchange rates among them so the markets always clear. The results suggest that if the information system and clearing are so good as to preclude moral hazard, any form of information asymmetry, and need for trust, the economy operates efficiently at any price level without government money. These conditions cannot reasonably be expected to hold in natural settings. In a second set of treatments when agents have the option of not delivering on their promises, a high enough penalty for non-delivery is necessary to ensure an efficient market; a lower penalty leads to inefficient, even collapsing, markets due to moral hazard.
We define and examine three minimal market games (sell-all, buy-sell, and double auction) in the laboratory relative to the predictions of theory. These closed exchange economies have some cash to facilitate transactions, and include feedback. The experiment reveals that (1) the competitive general equilibrium (CGE) and non-cooperative (NCE) models are reasonable anchors to locate most but not all the observed outcomes of the three market mechanisms; (2) outcomes tend to get closer to CGE predictions as the number of players increases; (3) prices and allocations in double auctions deviate persistently from CGE predictions; (4) the outcome paths across the three market mechanisms differ significantly and persistently; (5) importance of market structures for outcomes is reinforced by algorithmic trader simulations; and (6) none of the three markets dominates the others across six measures of performance. Inclusion of some mechanism differences into theory may enhance our understanding of important aspects of markets.
We define and examine the performance of three minimal strategic market games (sell-all, buy-sell, and double auction) in laboratory relative to the predictions of theory. Unlike open or partial equilibrium settings of most other experiments, these closed exchange economies have limited amounts of cash to facilitate transactions and include feedback. General equilibrium theory, since it abstracts away from market mechanisms and has no role for money or credit, makes no predictions about how the paths of convergence to the competitive equilibrium may differ across alternative mechanisms. Introduction of markets and money as carriers of process creates the possibility of motion. The laboratory data reveal different paths, and different levels of allocative efficiency in the three settings. The results suggest that abstracting away from all institutional details does not help understand dynamic aspects of market behavior. For example, the oligopoly effect of feedback from buying an endowed good is missed. Inclusion of mechanism differences into theory may enhance our understanding of important aspects of markets and money and help link conventional equilibrium analysis with dynamics.
Is personal currency issued by participants sufficient to operate an economy efficiently, with no outside or government money? Sahi and Yao (1989) and Sorin (1996) constructed a strategic market game to prove that this is possible. We conduct an experimental game in which each agent issues her personal IOUs, and a costless efficient clearinghouse adjusts the exchange rates among them so the markets always clear. The results suggest that if the information system and clearing are so good as to preclude moral hazard, any form of information asymmetry, and need for trust, the economy operates efficiently at any price level without government money. These conditions cannot reasonably be expected to hold in natural settings. In a second set of treatments when agents have the option of not delivering on their promises, a high enough penalty for non-delivery is necessary to ensure an efficient market; a lower penalty leads to inefficient, even collapsing, markets due to moral hazard.
Keywords: Strategic market games, Government and individual money, Efficiency, Experimental gaming
(Edited with James Mak, Shigeyuki Abe, and Kazuhiro Igawa) This collection of twenty six essays furnishes concise explanations of everyday Japanese life in simplified economic terms. They begin with such questions as, Do Japanese live better than Americans? Why don’t Japanese workers claim all their overtime? Why don’t Japanese use personal checking accounts? Why do Japanese give and receive so many gifts? The essays are written with non-technical accessible language intended for the undergraduate or advanced placement high school students taking an economics course or studying Japan in a social science course. The general reader will find the book a fascinating compendium of facts on Japanese culture and daily life.
Japan: Why It Works, Why It Doesn’t is a must for those who have acquired more than a casual interest in Japan and for visitors heading to or returning from Japan. The perspectives offered in this book will help readers organize their observations and acquired knowledge into an economic framework, thus giving them a fuller, deeper understanding of Japan.
“Every visitor to Japan notices many living and working arrangements that seem unusual–and often are. The authors have made a remarkable effort to explain these anomalies as rational responses to Japanese rules and regulations. Every curious visitor will benefit from, and enjoy, their lively effort.”
— Allan Meltzer, Carnegie Mellon University
Using Barnard and Simon’s contract model of organizations, this is the ONLY theory text that truly integrates financial, managerial, tax, auditing, not-for-profit and governmental aspects of accounting into a single framework within the economic theory of the firm.
(With Daniel Friedman) Laboratory experiments have become an important source of data in economics. Hundreds of journal articles, dozens of surveys, and several books report what laboratory experiments have helped economists discover about commodity and asset markets, industrial organization, committees and voting, laws and rules, individual choice, and many other fields. Until now, existing literature has provided little guidance to the researcher about the actual design and conduct of economic experiments.
This primer is the first readily accessible, self-contained summary of experimental methods and technique for students and researchers in economics. The authors touch on broad conceptual issues and discuss the basic principles but emphasize concrete procedures for successful experimentation: picking an interesting and important problem, creating a laboratory environment, choosing and motivating subjects, designing and conducting experiments, collecting and analyzing the data, and reporting the results. It will help beginners avoid making mistakes in organizing an experiment and to increase the experiment’s scientific returns.
“The authors succeed triumphantly in their chosen aim: providing helpful advice on all aspects of setting up, designing, implementing, and analyzing experiments. What is particularly satisfying is that the advice is not merely theoretical and abstract, but is based upon, and illustrated by, much experimental evidence. The book will prove to be of practical value to economists carrying out experiments, whether they are novices or semi-experts.”
— John D. Hey, Experiments in Economics
Oil Industry Profits examines the profitability of the oil industry over the fifteen-year period from 1961 to 1975 using data from accounting reports and stock prices. Sunder’s analysis of accounting data supports the conclusion that the oil industry had been no more profitable than other industrial firms during the past fifteen years. His analysis of the stock market data indicates that the risk-adjusted profits to the investor during this period have been slightly greater than the average profits for all firms listed on the New York Stock Exchange. The small positive abnormal profits realized over the fifteen-year period may be attributed to a small improvement in the prospects of the industry over these years. Because of the competitive nature of the stock market, stock prices reflect the investors’ assessments of an industry’s future prospects, and abnormal profits appear only in periods when those prospects change.