Economic Classroom Experiments/Kiyotaki Wright Hazlett Experiment

Traders in a barter economy suffer a double coincidence of wants problem, which is solved when the good with the lowest storage cost emerges as a common medium of exchange, i.e. money.

Overview

Level

Any level

Prerequisite knowledge

None

Suitable modules

Any

Intended learning outcomes

1. Origin of money.

Computerized Version

There is a computerized version of this experiment available on the Exeter games site.

You may find the sample instructions helpful.

Abstract

Students play together in a single large group as agents who meet randomly in pairs over the course of a number of rounds. There are 3 types of agents and 3 goods and each agent produces a different good from what they consume, so they must trade in order to consume. The experiment is designed so that trading can only occur if at least one agent in each pair is willing to accept a good that is not his/her own consumption good. Consequently the good with the lowest storage cost spontaneously emerges as the generally accepted medium of exchange.

Discussion of Likely Results

There are roughly equal numbers of Type 1, 2 and 3 agents and each starts round 1 with 40 points and one unit of the good that they produce.

Agent	Consumes	Consumption Bonus	Produces	Storage Cost	Net Payoff
Type 1	Good 1	20 points	Good 2	4 points	16 points
Type 2	Good 2	20 points	Good 3	9 points	11 points
Type 3	Good 3	20 points	Good 1	1 point	19 points

Agents earn the net payoff shown above when they trade for their own consumption good, otherwise they must pay the storage cost of whatever good they hold, whether they have traded in that round or not.

Good 1 is the least expensive to store and therefore emerges as 'money'.

Type 2 agents are at a disadvantage because they produce Good 3 which is the most costly to store and will usually only be accepted by a Type 3 agent. If Good 3 were less expensive to store, some Type 1 agents might accept it speculatively in the hope of quickly offloading it to a Type 3 agent holding Good 1.

Further Discussion Points

1. The inefficiency of a barter economy.
2. Money helps solve the problem of double coincidence of wants.
3. Fun discussion: some people may do quite well in a barter economy, see Kyle MacDonald: One Red Paperclip.