Summary of Project Plan

The theoretical and experimental literatures on the endogenous emergence of monetary systems have almost exclusively focused on bilateral and temporary trade encounters. Market participants cannot choose with whom and how many individuals to interact in a period. In other words, trade cannot happen on a stable network, but must occur on an unstable network consisting of a sequence of bilateral random meetings. By contrast, the theoretical and experimental literatures on social norms and networks have studied efficiency and cooperation in more general network configurations, but have ignored the role played by financial institutions in improving the economy’s performance.

The central innovation of this project is to leverage the relative strengths of these two separate literatures, in order to study the endogenous emergence of monetary and credit systems in economies arranged as networks. This is a new area of experimental and theoretical research, which has significant potential to shed light on the role of financial institutions because macroeconomies are best seen as networks of interacting agents rather than random two-person trading encounters.

The empirical investigation of how the structure of social interactions interacts with markets and financial institutions is a growing area of inquiry. It has implications for both testing and extending economic theory, and the formulation of policies that account for the importance of social network structure. In particular, the sustenance of cooperative behaviour is essential to enhance efficiency in the many types of economic interactions where it is not possible to implement a formal system of incentives. A focus of this project is the comparison of the efficiency of informal, decentralized arrangements – social networks – and the most basic form of financial institution – a monetary system. It also explores whether the presence of a monetary system complements or substitutes the role of social networks in sustaining cooperative behaviour. The results of the experiments are relevant and closely related to work in other social sciences (e.g. management, political science, sociology) as well as evolutionary biology. The project will involve a future PhD student of mine who has recently been awarded a fully-funded Faculty Studentship for the 2020-2023 period.