Rate-of-Return Dominance and Efficiency in an Experimental Economy

32 Pages Posted: 21 Dec 2014

See all articles by Gabriele Camera

Gabriele Camera

Chapman University - Economic Science Institute; University of Bologna - Dept. of Economics

Charles N. Noussair

Tilburg University

Steven James Tucker

University of Waikato Management School - Economics

Date Written: July 1, 2002

Abstract

One of the main challenges for monetary economics is to explain the use of assets that are dominated in rate-of-return as media of exchange.We use experimental methods to study howa fiat money might come to be used in transactions when an identically marketable, dividend-bearing asset, a consol, is also available. Our experimental economies, which have an overlapping generations structure, have the property that the only stationary rational expectations equilibria (SREE) require exclusive use of the consol as the medium of exchange. In a baseline treatment, agents use the consol exclusively, as would occur in an SREE. However, in other treatments, we observe episodes of rate-of-return dominance,with consistent use of fiat money as a medium of exchange. The results show that two properties of our economies are associated with the rate of return dominance anomaly. The first is a history of trading with fiat money, prior to the introduction of the consol. The second is the timing of the dividend payment; when the dividend payment follows the execution of trades between generations, hoarding of the consol occurs on the part of the old, who earn dividends by hoarding. In our economies, settling transactions with a dividend-bearing asset does not improve allocations over those resulting from trading with fiat money.

Keywords: Experimental overlapping generations model, Monetary equilibrium, Rate of return dominance.

JEL Classification: C92, E42

Suggested Citation

Camera, Gabriele and Noussair, Charles N. and Tucker, Steven James, Rate-of-Return Dominance and Efficiency in an Experimental Economy (July 1, 2002). Economic Theory, Vol. 22, 2003. Available at SSRN: https://ssrn.com/abstract=2540722

Gabriele Camera (Contact Author)

Chapman University - Economic Science Institute ( email )

Orange, CA 92866
United States

HOME PAGE: http://www1.chapman.edu/~camera/

University of Bologna - Dept. of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

Charles N. Noussair

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Steven James Tucker

University of Waikato Management School - Economics ( email )

Hamilton
New Zealand

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