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Incentives, communication, and payment instruments

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  • Edward Simpson Prescott
  • John A. Weinberg

Abstract

Alternative payment instruments are studied in an economy with private information, delayed communication, and limited commitment. Attention is restricted to checks and bank drafts, which differ in resource cost and communication characteristics. Checks are less costly but settlement delays create a limited commitment constraint. We find that drafts dominate at low wealths and checks at higher wealths. Applications to 19th century and modern payment systems are discussed.

Suggested Citation

  • Edward Simpson Prescott & John A. Weinberg, 2000. "Incentives, communication, and payment instruments," Working Paper 00-11, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:00-11
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    References listed on IDEAS

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    1. Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-1344, December.
    2. Williamson, Stephen D, 1999. "Private Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 469-491, August.
    3. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
    4. Kahn, Charles M & McAndrews, James & Roberds, William, 2003. " Settlement Risk under Gross and Net Settlement," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 591-608, August.
    5. McAndrews, James & Roberds, William, 1999. "A General Equilibrium Analysis of Check Float," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 353-377, October.
    6. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
    7. Kocherlakota, Narayana & Wallace, Neil, 1998. "Incomplete Record-Keeping and Optimal Payment Arrangements," Journal of Economic Theory, Elsevier, vol. 81(2), pages 272-289, August.
    8. Kahn, Charles M & Roberds, William, 1998. "Payment System Settlement and Bank Incentives," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 845-870.
    9. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    10. James J. McAndrews & William Roberds, 1999. "Payment intermediation and the origins of banking," Staff Reports 85, Federal Reserve Bank of New York.
    11. Charles M. Kahn & Dilip Mookherjee, 1998. "Competition and Incentives with Nonexclusive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 443-465, Autumn.
    12. Jeffrey M. Lacker, 1997. "The check float puzzle," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-26.
    13. Lacker, Jeffrey M., 1997. "Clearing, settlement and monetary policy," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 347-381, October.
    14. Bizer, David S & DeMarzo, Peter M, 1992. "Sequential Banking," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 41-61, February.
    15. Edward Simpson Prescott & Daniel D. Tatar, 1999. "Means of payment, the unbanked, and EFT '99," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 49-70.
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    Cited by:

    1. John A. Weinberg, 2002. "Imperfect competition and the pricing of interbank payment services," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 51-66.
    2. Ricardo de O. Cavalcanti, 2010. "Inside-money theory after Diamond and Dybvig," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 59-82.
    3. Lacker, Jeffrey M. & Weinberg, John A., 2003. "Payment economics: studying the mechanics of exchange," Journal of Monetary Economics, Elsevier, vol. 50(2), pages 381-387, March.

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    Keywords

    Checks ; Payment systems;

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