Mechanism Design and the Role of Enforcement in Freeman's Model of Payments
Freeman (1996a) is the first to formulate a model in which (i) debts are repaid with money and (ii) there can arise liquidity problems which give rise to a role for a central bank discount window. I ask whether this payment system is truly essential in his model. It is not because there is another mechanism - one which features (i) and (ii) - that works well. This is because of a strong assumption regarding the enforcement of debt contracts. I then present a slightly different model of enforcement based on collateralized lending where (i) is necessary, but (ii) is not. (Copyright: Elsevier)
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Volume (Year): 7 (2004)
Issue (Month): 1 (january)
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