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Incentive efficient risk sharing in a settlement mechanism

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  • Fujiki, Hiroshi
  • Green, Edward J.
  • Yamazaki, Akira

Abstract

The purpose of this paper is to address a question concerning risk management in continuing, multi-party, contractual, clearing and settlement arrangements through which large-value payments are typically made. We are particularly interested in the issues of incentive compatibility when a third party possesses a private information concerning the riskiness of transfers being made. If a third party possesses private information that would be of value in determining how best to settle a payment, how does the exposure of that party to the settlement risk affect the quality of information that the party chooses to provide? In this paper, we address this question by analyzing a specific class of parametric environments of a schematic, formal, model of a settlement arrangement or a payment network.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 142 (2008)
Issue (Month): 1 (September)
Pages: 178-195

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Handle: RePEc:eee:jetheo:v:142:y:2008:i:1:p:178-195

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Web page: http://www.elsevier.com/locate/inca/622869

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  1. Hiroshi Fujiki & Edward J. Green & Akira Yamazaki, 1999. "Sharing the risk of settlement failure," Working Papers 594, Federal Reserve Bank of Minneapolis.
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Cited by:
  1. Tore Nilssen, 2011. "Risk externalities in a payments oligopoly," Portuguese Economic Journal, Springer, vol. 10(3), pages 211-234, December.
  2. Robert A. Eisenbeis, 2006. "Home country versus cross-border negative externalities in large banking organization failures and how to avoid them," Working Paper 2006-18, Federal Reserve Bank of Atlanta.
  3. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
  4. Kocherlakota, Narayana & Wright, Randall, 2008. "Introduction to monetary and macro economics," Journal of Economic Theory, Elsevier, vol. 142(1), pages 1-4, September.

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