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A dynamic model of settlement

  • Koeppl, Thorsten Volker
  • Monnet, Cyril
  • Temzelides, Ted

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. JEL Classification: E4, E5

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Paper provided by European Central Bank in its series Working Paper Series with number 0604.

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Date of creation: Apr 2006
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Handle: RePEc:ecb:ecbwps:20060604
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  1. S. Rao Aiyagari & Stephen D. Williamson, 1998. "Money and Dynamic Credit Arrangements with Private Information," Game Theory and Information 9802002, EconWPA.
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  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.
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  14. 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.
  15. Aiyagari, S.R. & Williamson, S.D., 1997. "Credit in a Random Matching Model with Private Information," Working Papers 97-03, University of Iowa, Department of Economics.
  16. Arantxa Jarque, 2008. "Repeated moral hazard with effort persistence," Working Paper 08-04, Federal Reserve Bank of Richmond.
  17. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers 930, Queen's University, Department of Economics.
  18. 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.
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