Microfoundations of Money

Project Start: 01/2014
Status: Completed
Researchers: Gabriele Camera, Alessandro Gioffré
Category: Macro Finance
Funded by: LOEWE

Topic and Objectives

Money comes into existence when interaction is large-scale, decentralized, and there are trade frictions (enforcement, commitment and informational limitations). According to theory, money supports trade in a world without enforcement and, in particular, in large societies, where gift-exchange is unsustainable. We exchange money because, by doing so, we outperform equilibria based on rules of voluntary behavior. This notion hinges on a tacit assumption: money embodies a technology to enforce spot trades, which prevents traders from suffering losses.

In this project, we relax a routine assumption of monetary theory – only mutually beneficial outcomes are feasible – and show that monetary equilibrium cannot generally be sustained when monitoring and punishment limitations preclude adequate enforcement – formal or informal. Therefore, monetary exchange cannot operate as a stand-alone institution, and, without enforcement of property rights, it is afflicted by the same problems that undermine norms of voluntary behavior.

We also study decentralized trades without money, where incentives to cooperate are uneven, and new earning opportunities may emerge from asymmetric efforts. Here, the degree of heterogeneity is fundamental to determine whether a cooperative outcome will occur, and of what type.

Key Findings

SAFE Working Paper No. 32

  • Monetary exchange is not generally self-enforcing.
  • Enforcement institutions are complementary to, and not competing with, monetary systems.
  • Monetary equilibrium is unsustainable as societies grow.

     

SAFE Working Paper No. 162

  • Asymmetric cooperation can be achieved in societies with equal opportunities.
  • Asymmetric cooperation breaks down in societies with unequal opportunities.

Related Published Papers

Author/s Title Year Research Area Keywords
Gabriele Camera, Alessandro Gioffré Asymmetric Social Norms
Economics Letters
2017 Macro Finance cooperation, repeated games, social dilemmas
Gabriele Camera, Alessandro Gioffré Game-Theoretic Foundations of Monetary Equilibrium
Journal of Monetary Economics
2014 Macro Finance Social norms, repeated games, cooperation, payment systems

Related Working Papers

No. Author/s Title Year Research Area Keywords
162 Gabriele Camera, Alessandro Gioffré Asymmetric Social Norms 2017 Macro Finance cooperation, repeated games, social dilemmas
32 Gabriele Camera, Alessandro Gioffré Game-Theoretic Foundations of Monetary Equilibrium 2013 Macro Finance Social norms, repeated games, cooperation, payment systems

 

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