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A model of debit card as a means of payment

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  • Kim, Young Sik
  • Lee, Manjong

Abstract

This paper provides an explanation for both the rapid growth in the use of a debit card over time and the cross-sectional difference in the use of a debit card using a search-theoretic model. The trade-off between cash and a debit card as means of payment is incorporated such that a buyer incurs disutility cost proportional to the amount of cash holdings, while a seller accepting a debit card bears a fixed record-keeping cost regardless of transaction amount. As record-keeping cost decreases with the development of information technology over time, disutility cost of cash holdings required for pairwise trade eventually exceeds record-keeping cost so that all the agents with different wealth levels choose to use a debit card as a means of payment. Also, disutility cost of cash holdings required for pairwise trade would be higher for the rich than for the poor, implying the cross-sectional feature of payment pattern that the rich use a debit card more frequently than the poor. There are two distinct mechanisms that improve welfare as record-keeping cost decreases: one is to reduce deadweight loss from holding cash and the other is to reduce its distortionary effect on output produced in pairwise trade.

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  • Kim, Young Sik & Lee, Manjong, 2010. "A model of debit card as a means of payment," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1359-1368, August.
  • Handle: RePEc:eee:dyncon:v:34:y:2010:i:8:p:1359-1368
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    Cited by:

    1. Kim, Young Sik & Lee, Manjong, 2012. "Intermediary cost and coexistence puzzle," Economics Letters, Elsevier, vol. 117(1), pages 142-145.
    2. Ayushi Bajaj & Nikhil Damodaran, 2020. "Consumer Payment Choice and the Heterogeneous Impact of India’s Demonetization," Monash Economics Working Papers 07-20, Monash University, Department of Economics.
    3. Lee, Manjong, 2014. "Constrained or unconstrained price for debit card payment?," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 53-65.
    4. Andrea Mercatanti & Fan Li, 2017. "Do debit cards decrease cash demand?: causal inference and sensitivity analysis using principal stratification," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 66(4), pages 759-776, August.
    5. Beata Świecka & Paweł Terefenko & Tomasz Wiśniewski & Jingjian Xiao, 2021. "Consumer Financial Knowledge and Cashless Payment Behavior for Sustainable Development in Poland," Sustainability, MDPI, vol. 13(11), pages 1-18, June.
    6. Françoise Vasselin, 2018. "The Competition Between Cash and Mobile Payments in Markets with Mobile Partnerships A Monetary Search Model Point of View," Working Papers hal-01722404, HAL.
    7. Sébastien Lotz & Françoise Vasselin, 2019. "A New Monetarist Model Of Fiat And E‐Money," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 498-514, January.
    8. Bajaj, Ayushi & Damodaran, Nikhil, 2022. "Consumer payment choice and the heterogeneous impact of India’s demonetization," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    9. Françoise Vasselin, 2018. "The Competition Between Cash and Mobile Payments in Markets with Mobile Partnerships A Monetary Search Model Point of View," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01722404, HAL.
    10. Pidong Huang & Young Sik Kim & Manjong Lee, 2014. "Optimal Allocation of Social Cost for Electronic Payment System: A Ramsey Approach," Discussion Paper Series 1402, Institute of Economic Research, Korea University.
    11. Ayushi Bajaj & Nikhil Damodaran, 2021. "Consumer Payment Choice and the Heterogeneous Impact of India’s Demonetization," Monash Economics Working Papers 2021-15, Monash University, Department of Economics.
    12. Hendrickson, Joshua R. & Park, Jaevin, 2021. "The case against eliminating large denomination bills," Journal of Macroeconomics, Elsevier, vol. 68(C).
    13. Pidong Huang & Manjong Lee, 2015. "Coordination on Use of Non-deferred Electronic Payment Instruments," Korean Economic Review, Korean Economic Association, vol. 31, pages 5-24.
    14. Choi, Hyung Sun, 2019. "Money, debit card, gross-settlement risk, and central banking," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    15. Lee, Manjong, 2013. "Coexistence and welfare cost of inflation," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 23-32.

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