Endogenous Market Formation and Monetary Trade: An Experiment

Economic Science Institute Working Paper # 16-19, Chapman University

37 Pages Posted: 27 Sep 2016

See all articles by Gabriele Camera

Gabriele Camera

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

Dror Goldberg

The Open University of Israel

Avi Weiss

Bar-Ilan University - Department of Economics; Taub Center for Social Policy Studies in Israel; IZA Institute of Labor Economics

Date Written: August 30, 2016

Abstract

The theory of money assumes decentralized bilateral exchange and excludes centralized multilateral exchange. However, endogenizing the exchange process is critical for understanding the conditions that support the use of money. We develop a “travelling game” to study the spontaneous emergence of decentralized and centralized exchange, theoretically and experimentally. Players located on separate “islands” can either trade locally, or pay a cost to trade elsewhere, so decentralized and centralized markets can both emerge in equilibrium. The latter maximize trade meetings and are socially efficient; the former minimize trade costs through the use of money. In the laboratory, centralized exchange more frequently emerges when subjects perform diversified economic tasks, but also when they interact in large groups. This shows that to understand the emergence of money it is important to amend the theory of money such that the market structure is endogenized.

Keywords: endogenous institutions, macroeconomic experiments, matching, coordination, markets, money

JEL Classification: E4, E5, C9, C92

Suggested Citation

Camera, Gabriele and Goldberg, Dror and Weiss, Avi, Endogenous Market Formation and Monetary Trade: An Experiment (August 30, 2016). Economic Science Institute Working Paper # 16-19, Chapman University. Available at SSRN: https://ssrn.com/abstract=2843836 or http://dx.doi.org/10.2139/ssrn.2843836

Gabriele Camera

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

Dror Goldberg

The Open University of Israel ( email )

Raanana
Israel

Avi Weiss (Contact Author)

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
+972 3 531 8934 (Phone)
+972 3 535 3180 (Fax)

Taub Center for Social Policy Studies in Israel ( email )

15 Ha'ari Street
Jerusalem
Israel

HOME PAGE: http://taubcenter.org.il/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
24
Abstract Views
228
PlumX Metrics