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Abstract:
Some observations are made on the future directions of research in game theory that are to be expected in the next decade.

Game Theory, Gaming, Simulation, Evolutionary Game Theory

Abstract:
This paper deals with the changing relationship between economic theory and accounting practice and theory. It argues that many of the basic problems encountered in practice cannot be avoided in any attempt to construct an economic theory adequate to handle dynamics. In particular problems of timing become critical. furthermore, there are several critical problems concerning profit maximization, the nature of the rate of interest, agency problems within the firm and the payment of dividends which cannot be dealt with unless there is an adequate reconciliation of accounting and economic theory.

Abstract:
A discussion of the utilization of the methods of game theory in operations research is given together with a consideration of the future developments. The language and analogies provided by game theory are now broadly accepted. It is suggested that the deep successes of game theory have illuminated its limitations and have helped to open up investigations in computer science, behavioral economics and simulation where the limitations of intelligence and of data processing are taken into account.

Abstract:
A brief narrative and descriptive discussion of the role of private dealers in art together with some suggestive statistics is presented.

Art Dealers, Pricing, Market Size

Abstract:
A brief survey of the development of the study of risk and probability is given together with some basic observations on their application to insurance. This is followed with observations on the lack of appreciation of probability studies and an elementary feeling for probability by the public at large and a suggestion that the time is ripe for a new science museum involving basic economics and the exposition of the role of probability in finance.

Key words: Risk, Probability, Insurance

Abstract:
Although short sales make an important contribution to financial markets, this transaction faces legal constraints that do not govern long positions. In evaluating these constraints, other commentators, who are virtually all economists, have not focused rigorously enough on the precise contours of current law. Some short sale constraints are mischaracterized, while others are omitted entirely. Likewise, the existing literature neglects many strategies in which well advised investors circumvent these constraints; this avoidance may reduce the impact of short sale constraints on market prices, but may contribute to social waste in other ways. To fill these gaps in the literature, this paper offers a careful look at current law and draws three conclusions. First, short sales play a valuable role in the financial markets; while there may be plausible reasons to regulate short sales - most notably, concerns about market manipulation and panics - current law is very poorly tailored to these goals. Second, investor self-help can ease some of the harm from this poor tailoring, but at a cost. Third, relatively straightforward reforms can eliminate the need for self-help while accommodating legitimate regulatory goals. In making these points, we focus primarily on a burden that other commentators have neglected: profits from short sales generally are ineligible for the reduced tax rate on long-term capital gains, even if the short sale is in place for more than one year.

Short Sales, Speculative Bubble, Tax, Capital Gain, Locate Requirement, Uptick Rule, Noise Trader

Abstract:
Although short sales make an important contribution to financial markets, this transaction faces legal constraints that do not govern long positions. In evaluating these constraints, other commentators, who are virtually all economists, have not focused rigorously enough on the precise contours of current law. Some short sale constraints are mischaracterized, while others are omitted entirely. Likewise, the existing literature neglects many strategies in which well advised investors circumvent these constraints; this avoidance may reduce the impact of short sale constraints on market prices, but may contribute to social waste in other ways. To fill these gaps in the literature, this paper offers a careful look at current law and draws three conclusions. First, short sales play a valuable role in the financial markets; while there may be plausible reasons to regulate short sales - most notably, concerns about market manipulation and panics - current law is very poorly tailored to these goals. Second, investor self-help can ease some of the harm from this poor tailoring, but at a cost. Third, relatively straightforward reforms can eliminate the need for self-help while accommodating legitimate regulatory goals. In making these points, we focus primarily on a burden that other commentators have neglected: profits from short sales generally are ineligible for the reduced tax rate on long-term capital gains, even if the short sale is in place for more than one year.

Short Sales, Speculative Bubble, Tax, Capital Gain, Locate Requirement, Uptick Rule, Noise Trader

Abstract:
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment by thinking of assets as pools. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection and signalling phenomena in a perfectly competitive, general equilibrium framework.

Perfect competition eliminates the need for lenders to compute how the size of their loan or the price they quote might affect default rates. It also makes for a simple equilibrium refinement, which we propose in order to rule out irrational pessimism about deliveries of untraded assets.

We show that refined equilibrium always exists in our model, and that default, in conjunction with refinement, opens the door to a theory of endogenous assets. The market chooses the promises, default penalties, and quantity constraints of actively traded assets.

Default, Incomplete markets, Adverse selection, Moral hazard, Equilibrium refinement, Endogenous assets

Abstract:
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment by thinking of assets as pools. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection and signalling phenomena in a perfectly competitive, general equilibrium framework.

Perfect competition eliminates the need for lenders to compute how the size of their loan or the price they quote might affect default rates. It also makes for a simple equilibrium refinement, which we propose in order to rule out irrational pessimism about deliveries of untraded assets.

We show that refined equilibrium always exists in our model, and that default, in conjunction with refinement, opens the door to a theory of endogenous assets. The market chooses the promises, default penalties, and quantity constraints of actively traded assets.

Default, incomplete markets, adverse selection, moral hazard, equilibrium refinement, endogenous assets

Abstract:
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment by thinking of assets as pools. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection and signalling phenomena (including the Rothschild-Stiglitz insurance model) in a general equilibrium framework.

In contrast to game-theoretic models of adverse selection, our perfectly competitive framework eliminates the need for lenders to compute how the size of their loan or the price they quote might affect default rates. The equilibrium refinement we propose, in order to rule out irrational pessimism about deliveries of untraded assets, is also simpler than its game-theoretic counterparts.

We show that refined equilibrium always exists in our model, and that default, in conjunction with refinement, opens the door to a theory of endogenous assets. The market chooses the promises, default penalties, and quantity constraints of actively traded assets.

Default, Incomplete Markets, Adverse Selection, Moral Hazard, Equilibrium Refinement, Endogenous Assets

Abstract:
The relationship between money and credit is discussed in terms of network linkage. Fiat money is the only instrument with the universal recognition of its issuer. Near monies such as bank money and money substitutes such as gasoline credit cards can be classified in terms of their network links. This leads to a way of considering the velocity of money.

Credit, Fiat Money, Networks, Trust, Velocity

Abstract:
A simultaneous double auction market with bid and offer cards was utilized in classes on the theory and history of money and financial institutions and occasionally in classes on the theory of games. The prime purpose in using this game was to teach the students how to construct process models of economic phenomena. The second purpose was to consider the properties of the double auction market. The third purpose was to interpret the experimental results and link them to theory.

Double auctions, experimental games, allocation games, noncooperative equilibria

Abstract:
A categorization of terrorist groups in terms of centralized or decentralized financing and control is considered utilizing a business firm categorization. This is used to suggest some policy guides in combating terrorist activity.

Abstract:
The size and style of referencing for a large sample of 60 years of publications of the Cowles Foundation are examined. The influence of computerization is considered. Self-referencing is noted and some observations are made on the costs and distribution of research papers.

Referencing, Cost of Publication

Abstract:
Business organizations are faced with the financial and physical task of managing interrelated flows of material and cash. Material needs capital, and on the other hand, when finished goods are sold, they contribute to cash reserves. In this paper, we present and study a dynamic model in which inventory and financial decisions are made simultaneously and interact directly with each other in the presence of demand uncertainty and financial constraints. The criterion is to maximize the expected present value of dividends net of capital subscriptions. We establish conditions which imply that the optimal values of dividends, capital subscriptions, material procurement, and short term borrowing are nondecreasing functions of the levels of inventory and retained earnings. We establish that the optimal policy is myopic and explicitly characterized for a special and important case where both inventory costs and default penalties are linear. As a consequence, the optimal base-stock inventory level should be lower in a dividend-maximizing firm than in a profit-maximizing firm.

Dividends, Capital Subscription, Loans, Inventory, Default Penalty, Bankruptcy

Abstract:
In this paper we present a series of models, all within the context of a simple two-good economy, which bring out the distinctions between the different types of money and financial institutions. The models emphasize the physical properties of the economic goods, moneys, and trading systems. In Part 1 of the paper, we covered models in which the money is a consumable storable; here in Part 2 we consider economies using durable money, fiat money, or credit. Under this framework we are able to successfully contrast the role of private money lenders, banks, bilateral credit systems, and credit clearinghouses. We are also able to model the importance of the bankruptcy or default penalty in supporting the use of fiat.

Barley, gold, fiat and credit: evolution of money

Abstract:
A game theoretic approach to the theory of money and financial institution is given utilizing both the strategic and coalitional forms for describing the economy. The economy is first modeled as a strategic market game, then the strategic form is used to calculate several cooperative forms that differ from each other in their utilization of money and credit and their treatment of threats. It is shown that there are natural upper and lower bounds to the monetary needs of an economy, but even in the extreme structures the concept of "enough money" can be defined usefully, and for large economies the games obtained from the lower and upper bounds have cores that approach the same limit that is an efficient price system. The role of disequilibrium is then discussed.

Money, Prices, Core, Threat, Market game, Strategic market game

Abstract:
Sources of funding, cost of attack and defense, damage exchange rates and some myths of terrorist activities are considered.

terrorism funding, damage exchange rate

Abstract:
Three variations of the core of a market game representing an exchange economy are considered and compared. The possibility for utilizing the Walrasian core to reflect certain monetary phenomena is noted.

Market game, strategic market game, exchange economy, core, characteristic function

Abstract:
A model that includes the cost of producing money is presented and the nature of the inefficient equilibria in the model are examined. It is suggested that if one acknowledges that transactions are a form of production, which requires the consumption of resources, then the concept of Pareto optimality is inappropriate for assessing efficiency. Instead it becomes necessary to provide an appropriate comparative analysis of alternative transactions mechanisms in the appropriate context.

Strategic market games, seigniorage costs, inefficiency

Abstract:
A model that includes the cost of producing money is presented and the nature of the inefficient equilibria in the model are examined. It is suggested that if one acknowledges that transactions are a form of production, which requires the consumption of resources, then the concept of Pareto optimality is inappropriate for assessing efficiency. Instead it becomes necessary to provide an appropriate comparative analysis of alternative transactions mechanisms in the appropriate context.

Strategic market games, seigniorage costs, inefficiency

Abstract:
The knowledge constraints and transactions costs imposed by geographical distance, network connections and time conspire to justify local behavior as a good approximation for global rationality. We consider a class of games to illustrate this relationship and raise some questions as to what constitutes a satisfactory solution concept.

Local Games, Network Games, Advertising

Abstract:
The classical Fisher equation asserts that in a nonstochastic economy, the inflation rate must equal the difference between the nominal and real interest rates. We extend this equation to a representative agent economy with real uncertainty in which the central bank sets the nominal rate of interest. The Fisher equation still holds, but with the rate of inflation replaced by the harmonic mean of the growth rate of money. Except for logarithmic utility, we show that on almost every path the
long-run rate of inflation is strictly higher than it would be in the nonstochastic world obtained by replacing output with expected output in every period. If the central bank sets the nominal interest rate equal to the discount rate of the representative agent, then the long-run rate of inflation is positive (and the same) on almost every path. By contrast, the classical Fisher equation asserts that inflation should then be zero. In fact, no constant interest rate will stabilize prices, even if the economy is stationary with bounded i.d.d. shocks. The central bank must actively manage interest rates if it wants to keep prices bounded forever. However, not even an active central bank can keep prices exactly constant.

Inflation, Equilibrium, Control, Interest Rate, Central Bank, Harmonic Fisher Equation

Abstract:
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.

Strategic market games, government and individual money, efficiency, experimental gaming

Abstract:
We show by an iterated process of price normalization that there generically exists a price-normalizing bundle that determines a credit money, such that the enlargement of the general-equilibrium structure to allow for default subject to an appropriate credit limit and default penalty for each trader results in a construction of a simple mechanism for a credit using society to select a unique competitive equilibrium (CE). With some additional conditions, a common credit money can be applied such that any CE can be a unique selection by the credit mechanism with the appropriate credit limit and default penalties for the traders. This will include a CE with the "minimal cash flow" property. Such CEs are special for the reason that they minimize the need for a "substitute-for-trust" (i.e. money) in trade.

Competitive equilibrium, Credit mechanism, Marginal utility of income, IOU, Default penalty, Welfare economics

Abstract:
This paper considers a credit mechanism for selecting a unique competitive equilibrium (CE). It is shown that in general there exists a "price-normalizing" bundle, with which the enlargement of the general-equilibrium structure to allow for default subject to appropriate penalties results in a construction of a simple credit mechanism for a credit using society to select a unique CE. With some additional conditions, there exists a common price-normalizing bundle with which any CE can be a unique selection for the credit mechanism with appropriate default penalties. The selection can be utilized to select a CE that minimizes the need for money or credit in trade.

Competitive equilibrium, Credit mechanism, Marginal utility of income, IOU, Default penalty, Welfare economics

Abstract:
A credit mechanism is considered that selects a unique competitive equilibrium (CE) of an exchange economy. It is shown that a price normalization calling for a fixed monetary value for the total wealth in the economy and the addition of appropriate default penalties together result in a construction of a simple credit mechanism that selects a unique CE. The selection can be utilized to pick a CE that minimizes the need for trust in trade.

Competitive equilibrium, credit line, marginal utility of income, IOU, welfare economics

Abstract:
A credit mechanism is considered that selects a unique competitive equilibrium (CE) of an exchange economy. It is shown that a price normalization calling for a fixed monetary value for the total wealth in the economy and the addition of appropriate default penalties together result in a construction of a simple credit mechanism that selects a unique CE.

Banknotes, competitive equilibrium, credit line, Lagrangian multiplier, IOU, welfare economics

Abstract:
An Axiomatization for Power and for Equity differ only in the addition of a Behind the Veil Axiom.

General equilibrium theory, Uniqueness of equilbirium, Default

Abstract:
In this paper we examine the structure of the core of a trading economy with three competitive equilibria as the number of traders (N) is varied. We also examine the sensitivity of the multiplicity of equilibria and of the core to variations in individual initial endowments. Computational results show that the core first splits into two pieces at N = 5 and then splits a second time into three pieces at N = 12. Both of these splits occur not at a point but as a contiguous gap. As N is increased further, the core shrinks by N = 600 with essentially only the 3 competitive equilibria remaining. We find that the speed of convergence of the core toward the three competitive equilibria is not uniform. Initially, for small N, it is not of the order 1/N but when N is large, the convergence rate is approximately of the order 1/N. Small variations in the initial individual endowments along the price rays to the competitive equilibria make the respective competitive equilibrium (CE) unique and once a CE becomes unique, it remains so for all allocations on the price ray. Sensitivity analysis of the core reveals that in the large part of the endowment space where the competitive equilibrium is unique, the core either converges to the single CE or it splits into two segments, one of which converges to the CE and the other disappears.

Core, Multiple competitive equilibria, Speed of convergence, Sensitivity Analysis.

Abstract:
The basic theme is that there must be a balance between resources spent on tracking terrorist organizations, thereby preventing damage, and the resources spent on minimizing the effect of the damage they do. In particular a modern society depends heavily on twenty to thirty interdependent systems. The post-attack recuperation times of these systems are critical in determining the damage rendered. Active programs are needed to educate and involve society as a whole in minimizing the damage done and in living with the presence of terrorism.

terrorist organizations, post-attack recovery

Abstract:
We construct explicit equilibria for strategic market games used to model an economy with fiat money, one nondurable commodity, countably many time- periods, and a continuum of agents. The total production of the commodity is a random variable that fluctuates from period to period. In each period, the agents receive equal endowments of the commodity, and sell them for cash in a market; their spending determines, endogenously, the price of the commodity. All agents have a common utility function, and seek to maximize their expected total discounted utility from consumption.

Suppose an outside bank sets an interest rate rho for loans and deposits. If 1+rho is the reciprocal of the discount factor, and if agents must bid for consumption in each period before knowing their income, then there is no inflation. However, there is an inflationary trend if agents know their income before bidding.

We also consider a model with an active central bank, which is both accurately informed and flexible in its ability to change interest rates. This, however, may not be sufficient to control inflation.

Inflation, Strategic Market Game, Control, Interest Rate, Central Bank, Equilibrium

Abstract:
In this paper we present a series of models, all within the context of a simple two-good economy, which bring out the distinctions between the different types of money and financial institutions. The models emphasize the physical properties of the economic goods, moneys, and trading systems. Part 1 of the paper covers models in which the money is a consumable storable; the economies in Part 2 use durable money, fiat money, or credit. Under this framework we are able to successfully contrast the role of private money lenders, banks, bilateral credit systems, and credit clearinghouses. We are also able to model the importance of the bankruptcy or default penalty in supporting the use of fiat.

Barley, gold, fiat and credit, evolution of money

Abstract:
In previous work, the current authors derived a mathematical expression for the optimal (or "saturation") number of reinsurers for a given number of primary insurers (see Powers and Shubik, 2001). In the current paper, we show analytically that, for large numbers of primary insurers, this mathematical expression provides a "square-root rule"; i.e., the optimal number of reinsurers in a market is given asymptotically by the square root of the total number of primary insurers. We note further that an analogous "fourth-root rule" applies to markets for retrocession (the reinsurance of reinsurance).

Primary insurance, reinsurance, market size, square-root rule

Abstract:
We introduce and justify a taxonomy for the structure of markets and minimal institutions which appear in constructing minimally complex trading structures to perform the functions of price formation, settlement and payments. Each structure is presented as a playable strategic market game and is examined for its efficiency, the number of degrees of freedom and the symmetry properties of the structure.

Strategic Market Games, Clearinghouses, Credit Evaluation, Default

Abstract:
A discussion is given of the problems involved in the formal modeling of the innovation process. The link between innovation and finance is stressed. The nature of how the circular flow of funds is broken and the role of finance in evaluation and control is discussed.

Innovation, Invention, Circular flow, Finance

Abstract:
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.

Strategic market games, Laboratory experiments, Minimally intelligent agents, Adaptive learning agents, General equilibrium

Abstract:
In this paper we study the relationship between the stability of a competitive equilibrium (CE) and the price adjustment mechanism used to attain that equilibrium point. Using two specific examples, a three-commodity exchange economy with a unique competitive equilibrium (Scarf's global instability example) and a two-commodity, two-trader type exchange economy with multiple competitive equilibria, we show that the stability of a CE depends critically upon the dynamics of the price adjustment mechanism. A particular CE may be unstable under one price adjustment mechanism but stable under another. The joint dynamics of the chosen price adjustment mechanism and the given economy determines the overall stability of its competitive equilibrium. Our results suggest that context-rich studies of economic systems which focus on a specific price adjustment mechanism may provide insights into the dynamics and stability of economic systems that are often not revealed through a context-independent analysis.

Scarf's counter-example, Price adjustment mechanism, Feedback Controller, Multiple competitive equilibria, Stability

Abstract:
In a previous essay we modeled the enforcement of contract, and through it the provision of money and markets, as a production function within the society, the scale of which is optimized endogenously by labor allocation away from primary production of goods. Government and a central bank provided fiat money and enforced repayment of loans, giving fiat a predictable value in trade, and also rationalizing the allocation of labor to government service, in return for a fiat salary. Here, for comparison, we consider the same trade problem without government or fiat money, using instead a durable good (gold) as a commodity money between the time it is produced and the time it is removed by manufacture to yield utilitarian services. We compare the monetary value of the two money systems themselves, by introducing a natural money-metric social welfare function. Because labor allocation both to production and potentially to government of the economy is endogenous, the only constraint in the society is its population, so that the natural money-metric is labor. Money systems, whether fiat or commodity, are valued in units of the labor that would produce an equivalent utility gain among competitive equilibria, if it were added to the primary production capacity of the society.

Bureaucracy, contract enforcement, taxes, money

Abstract:
In order to explain in a systematic way why certain combinations of market, financial, and legal structures may be intrinsic to certain capabilities to exchange real goods, we introduce criteria for abstracting the qualitative functions of markets. The criteria involve the number of strategic freedoms the combined institutions, considered as formalized strategic games, present to traders, the constraints they impose, and the symmetry with which those constraints are applied to the traders. We pay particular attention to what is required to make these "strategic market games" well-defined, and to make various solutions computable by the agents within the bounds on information and control they are assumed to have. As an application of these criteria, we present a complete taxonomy of the minimal one-period exchange economies with symmetric information and inside money. A natural hierarchy of market forms is observed to emerge, in which institutionally simpler markets are often found to be more suitable to fewer and less-diversified traders, while the institutionally richer markets only become functional as the size and diversity of their users gets large.

Strategic Market Games, Clearinghouses, Credit Evaluation, Default

Abstract:
The competitive market structure of a decentralized economy is converted into a self-policing system treating the bureaucracy and enforcement of the legal system endogenously. In particular we consider money systems as constructs to make agents' economic strategies predictable from knowledge of their preferences and endowments, and thus to support coordinated resource production and distribution from independent decision making. Diverse rule systems can accomplish this, and we construct minimal strategic market games representing government-issued at money and ideal commodity money as two cases. We endogenize the provision of money and rules for its use as productive activities within the society, and consider the problem of transition from generalist to specialist production of subsistence goods as one requiring economic coordination under the support of a money system to be solved.

The scarce resource in a society is labor limited by its ability to coordinate (specifically, calling for the expenditure of time and effort on communication, computation, and control), which must be diverted from primary production either to maintain coordinated group activity, or to provide the institutional services supporting decentralized trade. Social optima are solutions in which the reduced costs of individual decision making against rules (relative to maintenance of coalitions) are larger than the costs of the institutions providing the rules, and in which the costs of the institutions are less than the gains from the trade they enable to take place.

Bureaucracy, contract enforcement, taxes, money

Abstract:
An overall view of the development of gaming and simulation is presented. This includes a consideration of some observations on what had been predicted and what happened as well as some predictions concerning the future. A stress is given to prediction based on what is technically feasible and prediction based on the socio-political environment. It is suggested the "to plan" is an irregular verb with four tenses: the past imperfect, the present unclear, the future perfect and finally, the future probable.

Abstract:
A voting with absenteeism game is defined as a pair (G;r) where G is an n-player (monotonic) simple game and r is an n-vector for which r_{i} is the probability that player i attends a vote. We define a power index for such games, called the absentee index. We axiomatize the absentee index and provide a multilinear extension formula for it. Using this analysis we re-derive Myerson's (1977, 1980) "balanced contributions" property for the Shapley-Shubik power index. In fact, we derive a formula which quantitatively gives the amount of the "balanced contributions" in terms of the coefficients of the multilinear extension of the game.

Finally, we define the notion of substitutes and complements in simple games. We compare these concepts with the familiar concepts of dummy player, veto player, and master player.

Simple game, Shapley-Shubik power index, absenteeism, multilinear extension, balanced contributions, substitute, complement

Abstract:
Why people accept intrinsically worthless fiat money in exchange for real goods and services has been a longstanding puzzle in economics. Attempts to explain the broad acceptance of fiat money have relied on either assuming that someone will exchange the fiat money for real consumption at the end of the horizon, or on pushing the puzzle of fiat money into infinite future in overlapping generations settings. We examine an alternative route that can explain the value of fiat money through a debt instrument which allows consumption to be moved backward in time. In this paper, we present empirical evidence that the theoretical predictions about the behavior of such economies work reasonably well in a laboratory experiment. The invention of fiat money and related debt instruments allow society to replace expensive commodities by costless paper and cut the dead weight loss associated with the former.

Experimental Gaming, Bank, Fiat money

Abstract:
The El Farol Bar problem with coordination is reconsidered in terms and extended with consideration of further context.

random search context

Abstract:
The monetary and fiscal control of a simple economy without outside randomness is studied here from the micro-economic basis of a strategic market game. The government's bureaucracy is treated as a public good that provides services at a cost. A conventional public good is also considered.

Dynamic programming, Public goods, Bureaucracy, Taxation

Abstract:
We argue that even when macroeconomic variables are constant, underlying microeconomic uncertainty and borrowing constraints generate inflation.

We study stochastic economies with fiat money, a central bank, one nondurable commodity, countably many time periods, and a continuum of agents. The aggregate amount of the commodity remains constant, but the endowments of individual agents fluctuate "independently" in a random fashion from period to period. Agents hold money and, prior to bidding in the commodity market each period, can either borrow from or deposit in a central bank at a fixed rate of interest. If the interest rate is strictly positive, then typically there will not exist an equilibrium with a stationary wealth distribution and a fixed price for the commodity. Consequently, we investigate stationary equilibria with inflation, in which aggregate wealth and prices rise deterministically and at the same rate. Such an equilibrium does exist under appropriate bounds on the interest rate set by the central bank and on the amount of borrowing by the agents.

If there is no uncertainty, or if the stationary strategies of the agents select actions in the interior of their action sets in equilibrium, then the classical Fisher equation for the rate of inflation continues to hold and the real rate of interest is equal to the common discount rate of the agents. However, with genuine uncertainty in the endowments and with convex marginal utilities, no interior equilibrium can exist. The equilibrium inflation must then be higher than that predicted by the Fisher equation, and the equilibrium real rate of interest underestimates the discount rate of the agents.

Inflation, Economic equilibrium and dynamics, Dynamic programming, Consumption

Abstract:
Closed exchange and production-and-exchange economies may have multiple equilibria, a fact that is usually ignored in macroeconomic models. Our basic argument is that default and bankruptcy laws are required to prevent strategic default, and these laws can also serve to provide the conditions for uniqueness. In this paper we report experimental evidence on the effectiveness of this approach to resolving multiplicity: Society can assign default penalties on fiat money so the economy selects one of the equilibria. Our data show that the choice of default penalty takes the economy to the neighborhood of the chosen equilibrium. The theory and evidence together reinforce the idea that accounting, bankruptcy and possibly other aspects of social mechanisms play an important role in resolving the otherwise mathematically intractable challenges associated with multiplicity of equilibria in closed economies. Additionally we discuss the meaning and experimental implications of default penalties that support an active bankruptcy-modified competitive equilibrium.

bankruptcy penalty, financial institutions, Fiat money, multiple equilibria, experimental gaming

Abstract:
A link between a no-side-payment (NSP) market game and a side-payment (SP) market game can be established by introducing a sufficient amount of an ideal utility-money of constant marginal utility to all agents. At some point when there is "enough money" in the system, if it is "well distributed" the new game will be a SP game. This game can also be related to a pure NSP game where a set of default parameters have been introduced. These parameters play a role similar to the parameters specifying the interpersonal comparisons in the side-payment game. We study this game for the properties of the delta-core and consider both the conditions for the uniqueness of competitive equilibria and a new approach to the second welfare theorem. A discussion of the relationship between market games and strategic market games is also noted.

delta-core, enough money, market games

Abstract:
The enlargement of the general-equilibrium structure to allow default subject to penalties results in a construction of a simple mechanism for selecting a unique competitive equilibrium. We consider economies for which a common credit money can be applied to uniquely select any competitive equilibrium with suitable default penalties. We identify two classes of such economies. One consists of economies with utility functions being homogeneous of degree 1; the other consists of economies with the number of consumers equal to the number of commodities and traders having quasi-linear utility functions with respect to different commodities.

competitive equilibrium, credit mechanism, marginal utility of income, welfare economics

Abstract:
This paper concludes the study on the modeling of money and financial institutions, which began in Quint and Shubik (2005a and b), and Quint and Shubik (2007). This paper begins by going through some of the one-period models of trade, with and without a banking system, including a new 'sell-all' market. The main goal then is to extend these to multiperiod models. The analysis considers the conditions for the free financing of the float by fiat money and also derives the explicit conditions under which strategic default is optimal for the traders.