An economy with personal currency: theory and experimental evidence.
An Economy with Personal Currency: Theory and Experimental Evidence
Martin Angerer and Juergen Huber, University of Innsbruck
Martin Shubik and Shyam Sunder, Yale University
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.”
Both theory and experimentation can now verify that in an ideal financial environment personal IOUs are sufficient or trade efficiency. The experimental and observational questions remain as to how these results are influenced by more realistic considerations of reputation and credit evaluation, contract enforcement and clearing arrangements….”