COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1675 The Value of Fiat Money with an Outside Bank: An Experimental Game Juergen Huber, Martin Shubik and Shyam Sunder September 2008 Why people accept intrinsically worthless fiat money in exchange for
real goods and services has been a longstanding question. There are many competing
sufficient explanations that may confound each other in practice but can be individually
tested in isolation experimentally. In this paper we examine a sufficient explanation of
the value of fiat money through the existence of a debt instrument which allows
consumption to be moved earlier in time. We present experimental evidence that the
theoretical predictions about the behavior of such economies work reasonably well in a
laboratory setting. The import of this finding for the theory of money is to show that the
presence of a societal bank and default laws provide sufficient structure to support the
use of fiat money, although many other institutions such as taxation provide alternatives. |
