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Merchant's Card Acceptance: An extension of the Tourist Test for Developing Countries

Author

Listed:
  • Jose Aurazo

    (Central Reserve Bank of Peru)

  • Jose Vasquez

    (Central Reserve Bank of Peru)

Abstract

This paper extends the tourist test model proposed by Rochet and Tirole (2011) by incorporating the government in order to take into account informality (understood as tax evasion in cash payments) and the net social cost of cash usage. These two elements are relevant in developing countries, where the shadow economy tends to be large and merchants usually evade taxes in cash transactions. The tourist test aims to determine an interchange fee that does not increase merchants' operating cost of accepting card payments. In the presence of informality, the tax gap between card and cash payments reduces merchants' net operating bene t of accepting card sales, which in turn lowers the interchange fee that passes the tourist test. In addition, the interchange fee resulting from the social welfare maximization exceeds this tourist test threshold while the interchange fee that maximizes the total user surplus is still compatible with the tourist test.

Suggested Citation

  • Jose Aurazo & Jose Vasquez, 2019. "Merchant's Card Acceptance: An extension of the Tourist Test for Developing Countries," IHEID Working Papers 11-2019, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heidwp11-2019
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    References listed on IDEAS

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    Cited by:

    1. Hongru Tan, 2020. "The regulation of merchant fees in credit card markets," Journal of Regulatory Economics, Springer, vol. 57(3), pages 258-276, June.
    2. Arango-Arango, Carlos A. & Betancourt-García, Yanneth Rocío & Restrepo-Bernal, Manuela, 2022. "An application of the tourist test to Colombian merchants," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 3(4).
    3. Shy, Oz, 2022. "Interchange fees with cashless stores, cashless consumers, and cash-only consumers," Economics Letters, Elsevier, vol. 212(C).

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    More about this item

    Keywords

    Tourist test; card payments; tax evasion; developing countries;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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