Rate-of-return dominance and efficiency in an experimental economy |
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Authors: | Gabriele Camera Charles Noussair Steven Tucker |
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Institution: | (1) Department of Economics, Purdue University, West Lafayette, IN 47907-1310, USA (e-mail: gcamera@mgmt.purdue.edu) , US;(2) Department of Economics, Emory University, Atlanta, GA 30322-2240, USA (e-mail: c.noussa@emory.edu) , US;(3) Department of Economics, University of Canterbury, Christchurch, NEW ZEALAND (e-mail: stu22@canterbury.ac.nz) , NZ |
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Abstract: | Summary. 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 how a 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.
Received: July 11, 2002; revised version: July 25, 2002
RID="*"
ID="*"We thank Anne Villamil, participants in the 2000 Purdue University Conference on Monetary Economics, the Summer 2000
meetings of the Economic Science Association, and a referee, for very helpful comments. We thank the Krannert School of Management
and the Purdue University Center for International Business, Education and Research for financial support and Vivian Lei for
research assistance. We also thank Ron Michener for referring us to the historical account of the early introduction of money
into the American colonies, as reported by Benjamin Franklin.
Correspondence to: G. Camera |
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Keywords: | and Phrases: Experimental overlapping generations model Monetary equilibrium Rate of return dominance |
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