Devising a model for inflation for a closed points system

Question

I am working on a project that involves points. The idea is that users will earn points and redeem them for certain rewards.

The means via which the users earn are fairly limited (They can attend a seminar, a class, etc).

I want to make sure that once the circulation of points increases, we want to employ an inflation model that increases the prices of the items.

I am a complete newbie to economics and have no clue how can this be achieved.

My initial attempts consist of models where the prices increase flatly with respect to the circulation amount - but that wouldn't be fair for people who haven't made any significant contribution to the circulation.

Second thought was to take into consideration the "average" increase in the users' income over a period and increase by that fator. But that is when it hit me - that way, the target prices will keep on increasing and no users will be able to redeem any rewards.

Should I explore per-capita income route? Is there a "text-book" model that I can read about and potentially implement to make a fair system that also motivates people to increase their income?

Answer 1

If your points are exchangable for rewards, the fundamental value of the points is entirely driven by the exchange rate between points and the rewards. (People may value the points more or less than the fundamental value for any number of reasons.)

This means that the inflation rate is entirely driven by the administered exchange rate - up until the point the program runs out of rewards. If you want to prevent the possibility of running out of rewards, the total supply of points must be held less than the redemption value.

This is similar to the operation of a gold standard. In the classical gold standard, a country’s currency (in principle) is exchangeable at a fixed rate against gold. (In practice, the implementation of gold standards changed over time.) You should be able to find a lot of resources on gold standard systems.

If you have a fixed supply of rewards, and you want to keep the exchange rate stable, you would need to find a way to drain points from the system - a tax.

In terms of motivating people, the major question is the value of the rewards. If people don’t want your rewards, your points will have little value.