A Theory of Payments-Chain Crises

Saki Bigio

No 191, Working Papers from Peruvian Economic Association

Abstract: This paper introduces an endogenous network of payments chains into a business cycle model. Agents order production in bilateral relations. Some payments are executed immediately. Other payments, chained payments, are delayed until other payments are executed. Because production starts only after orders are paid, chained payments induce production delays. In equilibrium, agents choose the amount of chained payments given interest rates and access to internal funds or credit lines. This choice determines the payments-chain network and aggregate total-factor productivity (TFP). The paper characterizes equilibrium dynamics and their innate inefficiencies. Agents internalize the direct costs of their payment delays, but do not internalize the costs induced onto others. This externality produces novel policy insights and rationalizes permanent reductions in TFP under excessive debt.

Keywords: Payments; Networks; Business Cycles (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-net and nep-pay
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Related works:
Working Paper: A Theory of Payments-Chain Crises (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:apc:wpaper:191

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