Default Penalty as a Selection Mechanism among Multiple Equilibria

Juergen Huber, Martin Shubik and Shyam Sunder
Additional contact information
Juergen Huber: University of Innsbruck

No 1730R2, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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)
Pages: 41 pages
Date: 2009-10, Revised 2014-10
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Journal of Behavioral and Experimental Finance (January 2016)

Downloads: (external link)
https://cowles.yale.edu/sites/default/files/files/pub/d17/d1730-r2.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Journal Article: Default penalty as a selection mechanism among multiple equilibria (2016)
Working Paper: Default Penalty as a Selection Mechanism among Multiple Equilibria (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:1730r2

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().