Working Paper
A dynamic model of the payment system
Abstract: The authors study the design of efficient intertemporal payment arrangements when the ability of agents to perform certain welfare-improving transactions is subject to random and unobservable shocks. Efficiency is achieved via a payment system that assigns balances to participants, adjusts them based on the histories of transactions, and periodically resets them through settlement. Their analysis addresses two key issues in the design of actual payment systems. First, efficient use of information requires that agents participating in transactions that do not involve monitoring frictions subsidize those that are subject to such frictions. Second, the payment system should explore the trade-off between higher liquidity costs from settlement and the need to provide intertemporal incentives. In order to counter a higher exposure to default, an increase in settlement costs implies that the volume of transactions must decrease, but also that the frequency of settlement must increase. ; Also issued as Payment Cards Center Discussion Paper No. 07-14
Keywords: Payment systems;
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Bibliographic Information
Provider: Federal Reserve Bank of Philadelphia
Part of Series: Working Papers
Publication Date: 2007
Number: 07-22