Payment networks in a search model of money

Abstract: In a simple search model of money, we study a special kind of memory that gives rise to an arrangement resembling a payment network. Specifically, we assume that agents can pay a cost to access a central database that tracks payments made and received. Incentives must be provided to agents to access the central database and to produce when they participate in this arrangement. We also study policies that can loosen these incentive constraints. In particular, we show that a "no-surcharge" rule has good incentive properties. Finally, we compare our model with that of Cavalcanti and Wallace.

Keywords: payment networks; money; search;

JEL Classification: E59; G29; L14;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2006-10-01

Number: 263

Note: For a published version of this report, see Antoine Martin, Michael Orlando, and David Skeie, "Payment Networks in a Search Model of Money," Review of Economic Dynamics 11, no. 1 (January 2008): 104-32.