Production, Hidden Action, and the Payment System

Chao Gu, Joseph Haslag and Mark Guzman

No 1004, Working Papers from Department of Economics, University of Missouri

Abstract: In this paper, we study a model economy that can account for the distribution of payments within a day. In our model, debtors choose when to arrive at the settlement location. Concomitant with choosing their arrival, debtors are making a production decision. We assume there is a cost to arriving early; that is, late-arrival is associated with a technology that dominates early arrival/production. Second, we treat the debtor's choice as hidden from creditors. We derive conditions under which the planner allocates production to each type of agents. In the decentralized setting, there is a nonarbitrage condition that is consistent with a positive intraday rate. The central bank may be able to implement the planner's allocation with a proper intraday interest rate. In some cases, the optimal intraday rate is positive.

Keywords: Friedman rule; discount window policy; payment system, intraday rate, settlement risk . (search for similar items in EconPapers)
JEL-codes: E31 E51 E58 (search for similar items in EconPapers)
Pages: 25 pgs.
Date: 2010-03-15
New Economics Papers: this item is included in nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Journal of Monetary Economics 2011

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Journal Article: Production, hidden action, and the payment system (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:umc:wpaper:1004

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