Default penalty as a selection mechanism among multiple equilibria

In spite of their importance in real economics, multiple equilibria in closed exchange and production-and-exchange economies are usually ignored in macroeconomic models. We argue that default and bankruptcy laws create conditions for a unique equilibrium. We report experimental evidence on the effectiveness of assigning default penalties on fiat money to resolve this multiplicity and select a single equilibrium. in laboratory, the choice of default penalty takes the economy near the chosen equilibrium, reinforcing the idea that social mechanisms such as accounting and bankruptcy play an important role in resolving the mathematically intractable challenges labour of multiple equilibria. JEL: D51, C73, C92, E42, G33