Simulating a Multiproduct Barter Exchange Economy

By Levy, Daniel; Bergen, Mark | Economic Inquiry, April 1993 | Go to article overview

Simulating a Multiproduct Barter Exchange Economy


Levy, Daniel, Bergen, Mark, Economic Inquiry


I. INTRODUCTION

As a research tool, experimental economics is a very useful device for studying many issues in economics, including choice theory, industrial organization, public finance, financial markets, etc. However, by its nature, most of the classroom applications concentrate on simulating microeconomic markets for specific goods or assets. For example, various versions of "double-oral auction" type experiments popularized by Smith |1962; 1965~ and his students are designed to demonstrate supply-demand interactions in generating competitive equilibria and to show the effects of various market organizations and regulations on competitive equilibrium outcomes. Similarly, various asset market experiments usually demonstrate different aspects of asset market organizations and operations, such as asset valuation, informational efficiency, or individual rationality.

In this paper we describe a multiproduct barter trading simulation experiment which we have successfully used since 1988 at the University of Minnesota, University of California/Irvine, Pepperdine University, University of Chicago, and Union College. The experiment can be used in introductory and intermediate macroeconomic classes as well as in more advanced classes such as money and banking. Despite the prevalence of various forms of barter in today's economies, most students are not aware of barter trade as a mechanism for exchange.(1) Experimenting with barter exchange provides a useful starting point for a classroom discussion of money and its role in the economy. Our version is specifically designed to demonstrate the limitations and inefficiencies of the traditional barter economy and to emphasize the role of money as a medium of exchange, unit of account, and store of value.(2) In addition, this experiment helps in demonstrating some of the key features that an object that serves as money should possess in order to function effectively and efficiently.

In the experiment students exchange real goods (various food items) in an open, pure-exchange market, without any restrictions. Unlike many experiments that last weeks and sometimes even an entire term, this experiment is not time consuming and can be easily conducted in one ninety-minute session, including the follow-up discussion. Also, unlike the experiments in which participants' preferences are set exogenously by the instructors, here the students' actions are based on their own personal preferences, and their trade objects are real goods, not plastic chips or index cards. This makes the experiment very realistic and life-like.(3)

II. DESCRIPTION OF THE EXPERIMENT

In principle the experiment can be conducted after a regular classroom lecture on "Money and its Role in the Economy." However, we find that students act more naturally, and also learn and enjoy more, when it is conducted before the lecture. During the lecture prior to the experiment day, we announce in class that we are preparing a surprise for the next meeting: we will serve food during regular lecture meeting and instead of talking economics, they will eat a nice breakfast/lunch/dinner (depending on the class meeting time). If the class meeting time falls outside ordinary dining hours, then promising every student 3 or 5 percent of the final course grade just for coming hungry to the classroom is always sufficient for a successful simulation of the experiment in class.(4) Class size usually is not a problem. We have simulated barter economies in classes with as few as seven students and as many as thirty-five students.

The experiment starts by giving each student (or alternatively each group of three to five students) an initial endowment of various food items. The example presented in Table I provides a list of some of the food items that can be distributed in a class of twenty-five students along with initial endowment allocations. We have used similar menus for various afternoon and evening classes. …

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