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Secondary currency acceptance: Experimental evidence with a dual currency search model

Justin Rietz ()

Journal of Economic Behavior & Organization, 2019, vol. 166, issue C, 403-431

Abstract: Motivated by the use of non-legal tender currencies in regions experiencing economic turmoil and by the growing use of cryptocurrencies such as Bitcoin, I examine in a controlled, experimental laboratory setting, the acceptance of a secondary currency when a primary currency already circulates in an economy. The underlying model is an indivisible goods / indivisible money, dual currency search model similar to that in Kiyotaki and Wright (1993) and Curtis and Waller (2000). In such models, there are two pure Nash equilibria - total acceptance or total rejection of the secondary currency - and one unstable, mixed equilibrium. This mixed equilibrium is considered an artifact of the indivisibility of money and goods in the model and is often ignored. I find that when a significant friction - in this case the inability to barter - is introduced, the equilibrium tends towards complete acceptance of the secondary currency. Conversely, when barter is readily available to subjects, the equilibrium tends towards total rejection. As predicted by theory, the tendency towards one equilibrium or the other appears to be influenced by the mixed equilibrium and the related basins of attraction.

Keywords: Secondary currency; Cryptocurrency; Currency shortage; Macro experiment (search for similar items in EconPapers)
JEL-codes: C92 D83 E41 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jebo.2019.07.010

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Handle: RePEc:eee:jeborg:v:166:y:2019:i:c:p:403-431