Default penalty as a selection mechanism among multiple equilibria

Juergen Huber, Martin Shubik and Shyam Sunder

Journal of Behavioral and Experimental Finance, 2016, vol. 9, issue C, 20-38

Abstract: The possibility of the presence of multiple equilibria in closed exchange and production-and-exchange economies is usually ignored in macroeconomic models even though they are important in real economies. We argue that default and bankruptcy laws serve to provide the conditions for uniqueness of an equilibrium. In this paper, we report experimental evidence on the effectiveness of this approach to resolving multiplicity: a society can assign default penalties on fiat money so that the economy selects one of the equilibria. The laboratory data show that the choice of default penalty takes the economy near the chosen equilibrium. The theory and evidence together reinforce the idea that accounting, bankruptcy and possibly other aspects of social mechanisms play an important role in resolving the otherwise mathematically intractable challenges associated with multiplicity of equilibria in closed economies.

Keywords: Bankruptcy penalty; Financial institutions; Fiat money; Multiple equilibria; Experimental gaming (search for similar items in EconPapers)
JEL-codes: C73 C92 D51 E42 G21 G33 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Default Penalty as a Selection Mechanism among Multiple Equilibria (2014)
Working Paper: Default Penalty as a Selection Mechanism among Multiple Equilibria (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:9:y:2016:i:c:p:20-38

DOI: 10.1016/j.jbef.2015.10.005

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