Payments and Mechanism Design

Thorsten Koeppl, Cyril Monnet and Ted Loch Temzelides

No 1124, Working Paper from Economics Department, Queen's University

Abstract: We use mechanism design to study 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. Our analysis has several implications for the design of actual payment systems. Efficiency requires that, in order to overcome informational frictions, agents participating in transactions that do not involve monitoring frictions subsidize those that are subject to such frictions. Optimal settlement frequency should balance liquidity costs from settlement against the need to provide intertemporal incentives. Settlement costs must be borne by agents for whom the incentives to participate in the system are highest. Finally, an increase in settlement costs implies that, in order to counter a higher exposure to default, the frequency of settlement must increase and, at the same time, the volume of transactions must decrease.

Keywords: Payment Systems; Frequency of Settlement; Liquidity Costs; Subsidization across Transactions (search for similar items in EconPapers)
Pages: 36 pages
Date: 2007-01
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1124.pdf First version 2007 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1124

Access Statistics for this paper

More papers in Working Paper from Economics Department, Queen's University Contact information at EDIRC.
Bibliographic data for series maintained by Mark Babcock ().