March, 2016

Endogenous Currency Formation in An Online Environment

The Case of Diablo II
  • Solomon Stein

    Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics
  • Alexander Salter

    Assistant Professor of Economics, Texas Tech University
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Find the article at SpringerLink. 

This paper presents a case study of the emergence of currency from a barter economy in an online game community. We use this case study to attempt to shed light on the relative importance of various types of frictions that lead to the emergence of money in search-theoretic models of currency formation. In particular, our study highlights the importance of exchange frictions relative to epistemic frictions. Using the records of an online message board dedicated to facilitating trades within the game, we document the emergence of currency and its stability over time.