Playing with Money

36 Pages Posted: 13 Feb 2019 Last revised: 19 Oct 2019

See all articles by Douglas D. Davis

Douglas D. Davis

Virginia Commonwealth University - School of Business - Department of Economics

Oleg Korenok

Virginia Commonwealth University - School of Business

Peter Norman

University of North Carolina (UNC) at Chapel Hill

Bruno Sultanum

Federal Reserve Banks - Federal Reserve Bank of Richmond

Randall Wright,

University of Wisconsin - Madison

Date Written: 2019-02-07

Abstract

Experimental studies in monetary economics usually study infinite horizon models. Yet, the time constraints of the laboratory sessions in which these models are conducted create finite horizons that imply monetary equilibria cannot exist. Moreover, laboratory subjects do not treat the probabilistic termination rule typically used in a manner consistent with the discount factor that the rule is intended to replace. Thus, it is unclear whether these experiments evaluate subjects' use of money to ameliorate trading frictions as an equilibrium phenomenon, their inability to understand backward induction, or features of games that promote the use of money behaviorally, even when doing so is not an equilibrium strategy. To address this issue, we present a pair of finite-horizon games where monetary exchange is an equilibrium, and report an experiment that evaluates behavior in these games in light of a finitely repeated alternative where monetary exchange is not an equilibrium.

Keywords: monetary economics, probabilistic termination rule, monetary theory

Suggested Citation

Davis, Douglas D. and Korenok, Oleg and Norman, Peter and Sultanum, Bruno and Wright,, Randall, Playing with Money (2019-02-07). FRB Richmond Working Paper No. 19-2. Available at SSRN: https://ssrn.com/abstract=3333603

Douglas D. Davis (Contact Author)

Virginia Commonwealth University - School of Business - Department of Economics ( email )

Box 844000
Richmond, VA 23284-4000
United States

Oleg Korenok

Virginia Commonwealth University - School of Business ( email )

1015 Floyd Avenue
Richmond, VA 23284-4000
United States

Peter Norman

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Bruno Sultanum

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Randall Wright,

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

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