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An economy with personal currency: theory and experimental evidence

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Is personal currency issued by participants sufficient to operate an economy efficiently, with no outside or government money? Sahi and Yao (in J Math Econ, 1989) and Sorin (in J Econ Theory, 1996) constructed a strategic market game to prove that this is possible. We conduct an experimental game in which each agent issues his/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.

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Correspondence to Juergen Huber.

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The authors are thankful to Benjamin Felt and Ryan Dunn for their laboratory assistance, and workshop participants at the Yale School of Management, the Institute for Financial Management and Research (Chennai), Osaka University, Tokyo University, Waseda University, Central University of Finance and Economics (Beijing), and a referee and the editor for helpful comments on earlier drafts of the paper. Financial support by Yale University and the Austrian Forschungsfoerderungsfonds FWF (grant P-20609) and the Tiroler Wissenschaftsfonds (grant UNI-0404/557) is gratefully acknowledged.

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Angerer, M., Huber, J., Shubik, M. et al. An economy with personal currency: theory and experimental evidence. Ann Finance 6, 475–509 (2010).

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