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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:
Everybody is talking about the 'information society' we live in, but rarely does anybody ask how valuable information actually is. Especially in financial markets, information is often seen as the only ingredient to success. With a simulation study and an experimental market, we explore how valuable information in a (virtual) market context is. While earlier work in this field covered this question with only two levels of information, we use ten different levels to control carefully for the influence of additional information on performance in a financial market. We find that additional information is mostly useless and sometimes even harmful for low and medium informed investors, while very good investors can profit from their information.

The second focus of the paper is to explore the usefulness of different trading strategies in this market. We compare active information processing (fundamental analysis) with a random strategy. Here we find that different information levels should use differing strategies, in particular the less informed should trade randomly, while the better informed should make use of their information. The logical consequence is that there is no single optimal strategy.

Value of information, Experimental Economics, Trading strategies, Information asymmetries

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:
We study whether information about imminent future dividends can abate bubbles in experimental asset markets. Using the seminal design of Smith et al. (1988) we find that markets where traders are asymmetrically informed about future dividends have smaller, and shorter, bubbles than markets with symmetrically informed or uninformed traders. Hence, fundamental values are better reflected in market prices - implying higher market efficiency - when some traders know more than others about the future prospects of an asset. We also find that asymmetric information has a similar abating impact on bubbles as when uninformed traders accumulate experience, though for different reasons.

Bubbles, information, experiment

Abstract:
In the U.S. campaign contributions by companies play a major role in financing election campaigns. We analyze contributions by companies before an election and stock market performance after the election for the presidential elections from 1992 until 2004. We find that (i) the percentage of contributions given to the winner in a presidential election and (ii) the total contribution (divided by market capitalization) have a significant positive impact on a company's stock market performance after an election. While under Clinton both factors were equally important, during the Bush-presidency the total contribution had comparatively more impact.

Presidential Election, Corporate Campaign Contribution, Abnormal Returns

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 question of how useful information in financial markets is has been discussed for decades and is still unresolved. In this paper we challenge the widely held belief that success and failure in the stock market can largely be attributed to the information underlying the trading decisions. We present results from a dynamic multi-period experimental financial market with asymmetrically informed traders whose information is based on future dividends. While the best informed traders can outperform all others, we find that information is not always useful, as average informed traders have significantly lower returns than the worst informed. This is mainly due to trend reversals in the fundamental information.

Value of information, asymmetric information, experimental economics, information structure

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:
Building on Grossman and Stiglitz (1980) and Sunder (1992) we present results from experimental asset markets where subjects endogenously choose between five information levels. Depending on the specific treatment either the costs of information or the maximum number of subjects with each information level is fixed. We find mostly supporting evidence for the conjectures of Grossman and Stiglitz (1980) and the results of Sunder (1992). More importantly, we observe that the relationship between information level and gross returns is not linear, but J-shaped. Looking at net returns after information costs, the uninformed have the highest net returns in each treatment, while informed traders are not able to recover their information costs.

Costly information, asset markets, experiment, value of information, heterogeneous information