CFDP Revision Date
Is personal currency issued by participants suﬀicient to operate an economy eﬀiciently, with no outside or government money? Sahi and Yao (1989) and Sorin (1996) constructed a strategic market game to prove that this is possible. We conduct an experimental game in which each agent issues 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.
Angerer, Martin; Huber, Juergen; Shubik, Martin; and Sunder, Shyam, "An Economy with Personal Currency: Theory and Experimental Evidence" (2007). Cowles Foundation Discussion Papers. 1919.