Why is fiat currency used as the primary medium of exchange in most societies when there are other assets available that provide a positive rate of return in each period? In this paper we investigate rate of return dominance using the techniques of experimental economics. We implement an overlapping generations environment with two assets, an intrinsically worthless fiat currency and a dividend-bearing asset. According to theory, the only stationary rational expectations equilibrium that exists is the sole use of the dominant asset as the medium of exchange. However, we were able to construct an experimental economy in which a dominated currency is accepted as a medium of exchange, either exclusively or in conjunction with the dominant asset. We provide two possible factors that allow the worthless asset to survive in the presence of a dominant asset. The first is a previous history of the fiat currency being accepted as a medium of exchange prior to the introduction of the dominant currency. The second is the timing of the dividend payment relative to the time of trade between generations

Co-authors Camera, G., Noussair, C.