Is Money Essential? An Experimental Approach

Abstract

Monetary exchange is called essential when better outcomes become incentive compatible when money is introduced. We study essentiality theoretically and experimentally using nite-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 signicantly enhanced by at currency if monetary equilibrium exists, but not otherwise. Also, recommendations help if incentive compatible, but not otherwise. Sometimes money gets used when it should not, and we investigate why, using surveys and measures of social preferences.