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A Model of Tiered Settlement Networks

James Chapman, Jonathan Chiu and Miguel Molico

Journal of Money, Credit and Banking, 2013, vol. 45, issue 2‐3, 327-347

Abstract: Payment and settlement networks typically involve various tiers of intermediation. This paper develops a model of settlement system to study the endogenous structure of tiered settlement networks, and the welfare consequences of clearing agent (CA) failure. We offer two explanations for tiering: private information regarding participant’s credit worthiness and economies of scale in the participation in the settlement system. CAs play a monitoring and cost‐saving role in the settlement network. As a result, a failure of a CA can lead to a large and persistent welfare loss to the economy.

Date: 2013
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Journal Article: A Model of Tiered Settlement Networks (2013) Downloads
Working Paper: A Model of Tiered Settlement Networks (2008) Downloads
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