Emergence of Money as a Medium of Exchange: An Experimental Study

Kiyotaki and Wright (1989) developed a simple dynamic model of an exchange economy in which one or more commodities are used as media of exchange. In this paper, we report ndings from an experiment that implements the Kiyotaki{Wright model. We consider whether the equilibrium predictions of the Kiyotaki-Wright model are robust to the dynamics created by out{of{equilibrium play. In particular, we examine whether individuals placed in the Kiyotaki{ Wright environment learn over time to adopt the same commodities as media of exchange as the model implies will be used in equilibrium. We nd that subjects have a strong tendency to play \fundamental" rather than \speculative" strategies even in environments where speculative strategies would lead to higher payo s. We examine some possible motivations for subjects' trading behavior and nd that subjects are mainly motivated by their own past payo experience as opposed to being motivated by the marketability concerns that the theory suggests are important. Journal of Economic Literature Classi cation Nos. C92, D83, E40. Financial support for this project was provided by the NSF under grant # SBR95{07968. We thank participants in several seminars as well as Matthew Shapiro and two annonymous referees for constructive comments and suggestions on an earlier draft. We are grateful to Chris Briem for research assistance and to Robert Conticello, Sridhar Komandur and Jie Xing for developing the program used to carry out the experiments. The raw data from the experimental sessions reported in this paper are available at www.pitt.edu/~cpbst9/exp.html.