Is Money Essential? An Experimental Approach

Abstract

Monetary exchange is called essential when better outcomes are incentive feasible with money than without it. We study essentiality theoretically, and experimentally, using finite-horizon monetary models that are naturally suited to the lab. Following mechanism design, we also study the effects of strategy recommendations, both when they are incentive compatible and when they are not. Results show output and welfare are significantly enhanced by fiat currency when monetary equilibrium exists. Also, recommendations help if incentive compatible, but not much otherwise. Sometimes money gets used when it should not, and we investigate why, using surveys and measures of social preferences.