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A Dynamic Model of Settlement

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Author Info

  • Thorsten Koeppl

    ()
    (Department of Economics, Queen's University)

  • Cyril Monnet

    ()
    (DG Research, European Central Bank)

  • Ted Temzelides

    ()
    (Department of Economics, University of Pittsburgh)

Abstract

We investigate the role of settlement in a dynamic model of a payment system where the ability of participants to perform certain welfare-improving transactions is subject to random and unobservable shocks. In the absence of settlement, the full information first-best allocation cannot be supported due to incentive constraints. In contrast, this allocation is supportable if settlement is introduced. This, however, requires that settlement takes place with a sufficiently high frequency.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1053.pdf
File Function: First version 2006
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1053.

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Length: 19 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:qed:wpaper:1053

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Keywords: Payment Systems; Settlement; Mechanism Design;

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References

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  1. Kahn, Charles M & Roberds, William, 1998. "Payment System Settlement and Bank Incentives," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 845-70.
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  8. S. Rao Aiyagari & Stephen D. Williamson, 1997. "Credit in a Random Matching Model With Private Information," Game Theory and Information 9705005, EconWPA.
  9. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 427-53, July.
  10. Arantxa Jarque, 2008. "Repeated moral hazard with effort persistence," Working Paper 08-04, Federal Reserve Bank of Richmond.
  11. Narayana R. Kocherlakota, 2005. "Optimal Monetary Policy: What We Know And What We Don'T Know," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 715-729, 05.
  12. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  13. Theodore Groves & Martin Loeb, 1974. "Incentives and Public Inputs," Discussion Papers 29, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  14. Kahn, Charles M. & Roberds, William, 2007. "Transferability, finality, and debt settlement," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 955-978, May.
  15. Temzelides, Ted & Williamson, Stephen D., 2001. "Payments Systems Design in Deterministic and Private Information Environments," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 297-326, July.
  16. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
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