We study the Lagos and Wright (2005) model of monetary exchange in the laboratory. With a finite population of sufficiently patient agents, this model has a unique monetary equilibrium and a continuum of non-monetary gift exchange equilibria, some of which Pareto dominate the monetary equilibrium. We find that subjects avoid the gift exchange equilibria in favor of the monetary equilibrium. We also study versions of the model without money where all equilibria involve non-monetary gift exchange. We find that welfare is higher in the model with money than without money, suggesting that money plays a role as an efficiency enhancing coordination device. ( JEL C92, D12, E40, Z13)

n/a

Chinese interbank foreign exchange trading was originally conducted through a centralized, anonymous limit order book (LOB). We determine the impact of the introduction of a parallel decentralized over-the-counter (OTC) market. We find that: (1) most trading migrated to the OTC, (2) the LOB price function is upward-sloping versus the OTC price function is downward-sloping, and (3) the LOB market has a single price function versus the OTC market has multiple price functions. Next, we develop a theoretical model of parallel markets that can simultaneously explain all of these empirical findings. We test a new model prediction and find support.

Monetary exchange is called essential when better outcomes become incentive compatible when money is introduced. We study essentiality theoretically and experimentally using finite-horizon monetary models that are naturally suited to the lab. Following mechanism design, we also study the effects of strategy recommendations both when they are incentive compatible and when they are not. Results show that output and welfare are significantly enhanced by fiat currency if monetary equilibrium exists but not otherwise. Also, recommendations help if incentive compatible but not otherwise. Sometimes money gets used when it should not, and we investigate why, using surveys and measures of social preferences.