Experimental studies in monetary theory, industrial organization, and financial markets
Abstract
This dissertation includes three essays using the methodology of experimental economics in order to analyze three separate topics: (1) rate of return dominance, (2) the effect of non-monetary punishment in the voluntary contribution mechanism, and (3) futures contracts in multi-period asset markets. In Essay 1, we use experimental methods to study how a fiat money might come to be used in transactions when an identically marketable, dividend-bearing asset, a consol, is also available. Our experimental economies, which have an overlapping generations structure, have the property that the only stationary rational expectations equilibria (SREE) require exclusive use of the consol as the medium of exchange. In a baseline treatment, agents use the consol exclusively, as would occur in an SREE. However, in other treatments, we observe episodes of rate-of-return dominance, as there is consistent use of fiat money as a medium of exchange. In Essay 2, we replicate and extend the experiment of Fehr and Gaechter (2000) that analyzes the effect of an opportunity to punish others on the level of contributions in the Voluntary Contributions Mechanism. The punishment is costly for both the players distributing and those receiving the punishment. Like Fehr and Gaechter, we find that agents often engage in non-credible costly punishment behavior in order to reduce the earnings of others who contribute low amounts to the public good. The availability of punishment increases average contributions sharply. Here, we also introduce a second treatment, identical to the first treatment, except that the “punishment” is non-monetary. The assignment of “non-monetary” punishment points does not reduce the payoff of any agent, but it can be used to register disapproval of others' contribution levels. Finally, Essay 3 develops an experiment to study the effect of a complete set of futures markets on the formation of price bubbles in multi-period lived asset markets. Two prominent hypotheses for the existence of the bubble-crash phenomenon are the lack of common expectations and the inability of subjects to backward induct for the entire time horizon of the experiment. If the lack of common expectations is the driving force behind price bubbles, then futures markets should eliminate the bubble by allowing subjects to make trades of the asset in future spot market periods. The contracts for future transactions will allow the subjects to evaluate the market value of the asset in future periods, and thus develop common expectations. The experimental design should also eliminate the problem of subjects' inability to backward induct for the entire 15 periods of the experiment. (Abstract shortened by UMI.)
Degree
Ph.D.
Advisors
Noussair, Purdue University.
Subject Area
Economic theory|Economics
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