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A model of check exchange

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Author Info

  • James McAndrews
  • William Roberds

Abstract

The authors construct and simulate a model of check exchange to examine the incentives a bank (or a bank clearinghouse) has to engage in practices that limit access to its payment facilities, in particular delaying the availability of check payment. The potentially disadvantaged bank has the option of directly presenting checks to the first bank. The authors find that if the retail banking market is highly competitive, the first bank will not engage in such practices, but if the retail banking market is imperfectly competitive, it will find it advantageous to restrict access to its facilities. Lower costs of direct presentment can reduce (but not eliminate) the range over which these practices are employed. The practice of delayed presentment can either reduce or increase welfare, again depending on the degree of competition in the market. The model suggests that, were the Federal Reserve System to exit the business of check processing, practices such as delayed presentment would b e more prevalent.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 97-16.

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Date of creation: 1997
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Handle: RePEc:fip:fedpwp:97-16

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Related research

Keywords: Check collection systems ; Clearinghouses (Banking);

References

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  1. Economides, N. & Lopomo, G. & Woroch, G., 1996. "Regulatory Rules to Neutralize Network Dominance," Working Papers 96-14, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Economides, Nicholas & Lopomo, Giuseppe & Woroch, Glenn, 1996. "Regulatory Pricing Rules to Neutralize Network Dominance," Industrial and Corporate Change, Oxford University Press, vol. 5(4), pages 1013-28.
  3. Prager, Robin A & Hannan, Timothy H, 1998. "Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 433-52, December.
  4. Allen N. Berger & Timothy H. Hannan, 1987. "The price-concentration relationship in banking," Research Papers in Banking and Financial Economics 100, Board of Governors of the Federal Reserve System (U.S.).
  5. Nicholas Economides & Giuseppe Lopomo & Glenn Woroch, 1997. "Strategic Commitments and the Principle of Reciprocity in Interconnection Pricing," Industrial Organization 9701001, EconWPA.
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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. Sherrill Shaffer, 1997. "Network diseconomies and optimal structure," Working Papers 97-19, Federal Reserve Bank of Philadelphia.

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