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On the essentiality of E-money

Jonathan Chiu () and Tsz-Nga Wong ()

No 5205, Working Paper Series from Victoria University of Wellington, School of Economics and Finance

Abstract: Recent years have witnessed the advances of e-money systems such as Bitcoin, PayPal and various forms of stored-value cards. This paper adopts a mechanism design approach to identify some essential features of different payment systems that implement the optimal resource allocation. We find that, compared to cash, e-money technologies allowing limited participation, limited transferability and non-zero-sum transfers can help mitigate fundamental frictions and enhance social welfare, if they satisfy conditions in terms of parameters such as trade frequency and bargaining powers. An optimally designed e-money system exhibits realistic arrangements including non-linear pricing, cross-subsidization and positive interchange fees even when the technologies incur no costs. Regulations such as a cap on interchange fees (Ã la the Dodd-Frank Act) can distort the optimal mechanism and reduce welfare.

Keywords: Money; Electronic money; Mechanism design; Search and matching; Efficiency (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cse, nep-mon and nep-pay
Date: 2016
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Working Paper: On the Essentiality of E-Money (2015) Downloads
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Handle: RePEc:vuw:vuwecf:5205