An Economy with Personal Currency: Theory and Evidence

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An Economy with Personal Currency: Theory and Evidence. Martin Angerer, Jrgen Huber, Martin Shubik and Shyam Sunder Yale School of Management Faculty Workshop, October 1, 2008. Background of Theory. BEYOND GENERAL EQUILIBRIUM. - PowerPoint PPT Presentation

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  • An Economy with Personal Currency: Theory and EvidenceMartin Angerer, Jrgen Huber, Martin Shubik and Shyam SunderYale School of Management Faculty Workshop, October 1, 2008

  • Background of Theory

    An Economy with Personal Money

  • BEYOND GENERAL EQUILIBRIUMWork brings together two strands: Strategic Market Games (M.S.) and Minimal Intelligence Agents (S.S.)General Equilibrium is the right abstraction to study efficient prices.But it is inadequate for dynamics.Strategic Market games offer a fully defined process model of trade.

    An Economy with Personal Money

  • Arrows ConcernArrow worried (1972) that process models would proliferate too many special cases.They do, but there is a solution: Minimal Institutions and bounding behavior.3 trading mechanismsnatural lower bounds.2 types of agentsvon Neumann players and minimal intelligence players (upper and lower bounds).

    An Economy with Personal Money

  • *An Economy with Personal Money*An OverviewBackground paper briefly: Three Minimal Market InstitutionsIs personal currency/credit issued by individuals sufficient to operate an economy efficiently with no outside or government money?Sahi-Yao (1991) and Sorin (1995)s construction of a strategic market game proves that it is possibleWe report on a laboratory experiment in which each agent issues IOUs, and a costless efficient clearinghouse adjusts the exchange rates so markets always clearResult: when information system and clearinghouse preclude moral hazard, information asymmetry or need for trust, such economy operates efficiently without government moneyResult: When agents have opportunity to default on their delivery promises, a high enough penalty is needed for efficiencyIt may be better to look for explanations for the prevalence of government money either in the abovementioned frictions, or in our unwillingness to experiment with innovation

    An Economy with Personal Money

  • Three Minimal Market Institutions: Theory and Experimental EvidenceJrgen Huber, Martin Shubik, and Shyam Sunder

  • *An Economy with Personal Money*OutlineThree minimal market designsExperimental implementationResults compared to three benchmarks:General equilibriumNon-cooperative equilibrium with 10 tradersMinimally-intelligent traders (simulation)Concluding remarks

    An Economy with Personal Money

  • *An Economy with Personal Money*Market setup (in all three settings)Two goods (A and B) traded for moneyEach trader endowed with either good A or B, and moneyMultiplicative earnings function: Earnings = (A . B) + net moneyMoney carried over from period to period (except in double auction)

    An Economy with Personal Money

  • *An Economy with Personal Money*Three Minimal Market InstitutionsThe sell-all model (strategy set dimension 1: all commodity endowment sold; each trader bids an amount of money to buy each commodity)The buy-sell model (strategy set dimension 2: each trader offers the quantity of the endowed good and bids money for the other good)The simultaneous double auction model (strategy set dimension 4: each trader offers to sell each good and bids to buy each good)

    An Economy with Personal Money

  • *An Economy with Personal Money*Sell All Market

    An Economy with Personal Money

  • *An Economy with Personal Money*

    An Economy with Personal Money

  • *An Economy with Personal Money*Buy-Sell Market

    An Economy with Personal Money

  • *An Economy with Personal Money*

    An Economy with Personal Money

  • *An Economy with Personal Money*Double Auction

    An Economy with Personal Money

  • *An Economy with Personal Money*Endowments(Good A, Good B, Money)

    (200, 0, 6000) or (0, 200, 6000) in sell-all(200, 0, 4000) or (0, 200, 4000) in buy-sell20, 0 4000) or (0, 20, 4000) in double-auction10 traders in each market (5+5)One buy-sell market with 20 traders (10+10)

    An Economy with Personal Money

  • *An Economy with Personal Money*General and Non-Cooperative Equilibria

    Initial EndowmentCGEQuantity/PriceNCE (5+5)Quantity/PriceABABABSell All2000100/20100/ 20110/20.190/20.1Buy Sell2000100/20100/ 20122/2078/ 20Double Auction20010/ 10010/ 10011/ 1009 100

    An Economy with Personal Money

  • *An Economy with Personal Money*Comparison of markets I

    An Economy with Personal Money

  • *An Economy with Personal Money*Comparison of markets II

    An Economy with Personal Money

  • *An Economy with Personal Money*SymmetryBuy-sellSell-allDouble auction

    An Economy with Personal Money

  • *An Economy with Personal Money*Comparison of markets III

    An Economy with Personal Money

  • *An Economy with Personal Money*Avg. PricesBuy-sellSell-allDouble auction

    An Economy with Personal Money

  • *An Economy with Personal Money*Trading vol.Buy-sellSell-allDouble auction

    An Economy with Personal Money

  • *An Economy with Personal Money*Conclusions from the Background PaperThe non-cooperative and general competitive equilibrium models provide a reasonable anchor to locate the observed outcomes of the three market mechanismsUnlike well known results from many partial equilibrium double auctions, prices and allocations in our double auctions reveal significant and persistent deviations from CGE predictionsThe market form has a significant influence on allocative efficiency and the return distribution: the outcome paths from the three market mechanisms exhibit significant differences among them.

    An Economy with Personal Money

  • A Practical ExampleA few days ago the New York Stock Exchange provided a good example of a primarily credit-driven market with exogenous uncertainty

    An Economy with Personal Money

  • *An Economy with Personal Money*The Current Paper:Need for Government Money?Is outside or government money necessary to operate an economy efficiently?Proponents of alternatives to government money suggest that if all individuals and institutions could issue debt as means of payment, market will sort out the risk and reputations of accepting such paper;For example, Black (1970); rates of interest in the City of London for prime and lesser names, discounting of bills issued by hundreds of banks in the free banking era of the U.S.

    An Economy with Personal Money

  • *An Economy with Personal Money*Summary ResultsOutside or government money is not needed if there is perfect clearing and no defaultResult is valid under conditions which are clearly counterfactual (like M&M on neutrality of cost of capital with respect to leverage)Logical possibility of such an economy does not mean that an economy will actually function smoothly with private money under exogenous uncertainty, and dispersed and imperfect informationProcess dynamics, trust and evaluation are core issues in functioning of a financial system and are absent in Black or M&M equilibrium modelsPresence of moral hazard requires sufficiently high penalties on defaults for efficient functioning

    An Economy with Personal Money

  • *An Economy with Personal Money*EquilibriumSorin establishes the existence of an active non-cooperative equilibrium set of prices and exchange rates which converges to a competitive equilibrium as the number of traders increasesThe clearinghouse calculates prices and exchange rates by balancing the expenditures and revenues for all

    An Economy with Personal Money

  • *An Economy with Personal Money*Sorin (1995) ModelConsider a set A of n agents and set I of m goods. There are m posts, one for each good where each agent bids quantity of money bi for good i and offers a quantity of goods qi of good i for sale. t() is the exchange rate for currency of agent .The equations defining prices in terms of the unit of account t(1) are: And the budget balance gives

    An Economy with Personal Money

  • *An Economy with Personal Money*Acceptability of Government MoneyNo bank (much less individual) can match visibility of governmentGovernments reputation is known to allGovernment is better able to enforce the rules of the gameGovernment money expedites and simplifies taxation as an unintended consequenceHands additional policy options to government (e.g., financing of wars and control of economy)Acceptability of IOUs requires trust; trust in government may be higher in most instances than in even big banks (individuals have little chance)Everyone-a-banker game could be seen as a simplified version of governments issuing their own money in international exchanges to settle their payments Treatment 1: No frictional and informational issues: is the logical possibility of private money economy also a behavioral possibilityTreatment 2: Introduce moral hazard of default, and vary penalties

    An Economy with Personal Money

  • *An Economy with Personal Money*Laboratory ModelComputer implements the sell-all modelUses the quantities endowed and money bid for each good to calculate a market clearing price for each good and exchange rates for each traders moneyComputer acts as a clearing house as well as a perfect reputation enforcement mechanism (no reneging, no bankruptcy in Treatment 1)Examines every-one-a-banker model in absence of uncertainty-related explanations for government moneyYields high efficienciesKey theoretical claim that government money is not needed for efficiency exchanges is supported experimentally under these circumstancesIdeal contract enforcement, credit evaluation, and clearing arrangements

    An Economy with Personal Money

  • *An Economy with Personal Money*ExperimentTwo goodsTwo types of traders with endowment (200,0) and (0, 200)Upper limit on IOUs issued: 6,000Each agent submit

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