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Journal Article
Regulating debit cards: the case of ad valorem fees
Debit cards have become an indispensable part of the U.S. payments system, accounting for more than a third of consumer payments at point of sale. With this development has come controversy: Card networks charge merchants fees that merchants believe are too high. And most of the fees are ad valorem that is, based on transaction value rather than fixed fees per transaction. ; Given that debit cards incur a fixed cost per transaction, why do networks charge ad valorem fees? How do ad valorem fees affect payment market participants, including consumers, merchants, and card networks? And should ...
Briefing
Should the Fed Issue Digital Currency?
The United States might benefit from eventually replacing most physical cash with central bank digital currency (CBCD), but first the Federal Reserve must resolve several key policy and implementation issues, such as establishing comparative advantage over private issuers and ensuring safety and soundness.
Journal Article
Opinion: Artificial Intelligence: Potentials and Prospects
We are at the dawn of a new technological revolution. The recent development of artificial intelligence (AI), especially the emergence of generative AI, has offered a plausible future in which machines will eventually free humans from a wide range of cognitive tasks, unleashing vast creativity and productivity gains.
Working Paper
Demand externalitites and price cap regulation: Learning from a two-sided market
This paper studies unintended consequences of price cap regulation in the presence of demand externalities in the context of payment cards. The recent U.S. debit card regulation was intended to lower merchant card acceptance costs by capping the maximum interchange fee. However, small-ticket merchants found their fees instead higher after the regulation. To address this puzzle, I construct a two-sided market model and show that card demand externalities across merchant sectors rationalize card networks? pricing response. Based on the model, I study socially optimal card fees and an ...
Working Paper
Technological innovation and market turbulence: the dot-com experience
This paper explains market turbulence, such as the recent dotcom boom/bust cycle, as equilibrium industry dynamics triggered by technology innovation. When a major technology innovation arrives, a wave of new firms enter the market implementing the innovation for profits. However, if the innovation complements existing technology, some new entrants will later be forced out as more and more incumbent firms succeed in adopting the innovation. It is shown that the diffusion of Internet technology among traditional brick-and-mortar firms is indeed the driving force behind the rise and fall of ...
Working Paper
Payment Choice and the Future of Currency: Insights from Two Billion Retail Transactions
This paper uses transaction-level data from a large discount chain together with zip-code-level explanatory variables to learn about consumer payment choices across size of transaction, location, and time. With three years of data from thousands of stores across the country, we identify important economic and demographic effects; weekly, monthly, and seasonal cycles in payments, as well as time trends and significant state-level variation that is not accounted for by the explanatory variables. We use the estimated model to forecast how the mix of consumer payments will evolve and to forecast ...
Journal Article
Technology Diffusion: The Case of Internet Banking
Taking internet banking as an example, we study diffusion of cost-saving technological innovations. We show that the diffusion of internet banking follows an S-shaped logistic curve as it penetrates a log-logistic bank-size distribution. We test the theoretical hypothesis with an empirical study of internet banking diffusion among banks across fifty U.S. states. Using an instrument-variable approach, we estimate the positive effect of average bank size on internet banking diffusion. The empirical findings allow us to examine the technological, economic, and institutional factors governing the ...
Briefing
Explaining the car industry cluster: the case of U.S. car makers from 1895-1969
The geographic clustering of companies within an industry is often attributed to several agglomeration economies: intra-industry spillovers (benefits from proximity to firms in the same industry), inter-industry spillovers (benefits from proximity to firms in related industries), and spinoffs (firms established by former employees of a company in the same industry). Analysis of data on the U.S. auto industry in its first 75 years sheds light on the relative importance of those forces to the clustering of car makers
Working Paper
Microfoundations of two-sided markets: the payment card example
This paper provides a theory of two-sided market dynamics with arguably better microfoundations. These alternative microfoundations focus on observable heterogeneities of both sides of the market in a competitive framework. The theory is rich in empirical predictions and is less dependent on a particular form of imperfect competition than other approaches. Our findings in the payment card example point to adoption costs and the distribution of consumer incomes and firm sizes as the key determinants of the shares of costs borne by each side. This result provides clear implications for industry ...
Briefing
Real Estate Commissions and Home Search Efficiency
In the U.S. residential housing market, homebuyers' agents typically offer free house showings and collect a commission equal to 3 percent of the price of the home bought by their clients. Our analysis shows that, by deviating from cost basis, this compensation structure may lead to elevated home prices, overused agent services and prolonged home searches. We explain that shifting to a simple a la carte compensation structure may improve home search efficiency and social welfare.