ON THE WELFARE EFFECTS OF CREDIT ARRANGEMENTS

Jonathan Chiu, Mei Dong and Enchuan Shao

International Economic Review, 2018, vol. 59, issue 3, 1621-1651

Abstract: This article studies the welfare effects of credit arrangements and how these effects depend on the trading mechanism and inflation. In a competitive market, credit arrangements can be welfare reducing, because high consumption by credit users drives up the price level, reducing consumption by money users who are subject to a binding liquidity constraint. By adopting an optimal trading mechanism, however, these welfare implications can be overturned. Both price discrimination and nonlinear pricing are essential features of an optimal mechanism.

Date: 2018
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https://doi.org/10.1111/iere.12315

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Working Paper: On the Welfare Effects of Credit Arrangements (2012)
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