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Incentive Efficient Risk Sharing in Settlement Mechanism

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Listed:
  • Hiroshi Fujiki

    (Bank of Japan)

  • Edward J. Green

    (Pennsylvania State University)

  • Akira Yamazaki

    (Meisei University)

Abstract

The purpose of this paper is to address a question concerning risk management in continuing, multi-party, contractual, clearing and settlement arrangements through which large-value payments are typically made. We are particularly interested in the issues of incentive compatibility when a third party possesses a private information concerning the riskiness of transfers being made. If a third party possesses private information that would be of value in determining how best to settle a payment, how does the exposure of that party to the settlement risk affect the quality of information that the party chooses to provide? In this paper, we address these questions by analyzing a specific class of parametric environments of a schematic, formal, model of a settlement arrangement or a payment network.

Suggested Citation

  • Hiroshi Fujiki & Edward J. Green & Akira Yamazaki, 2007. "Incentive Efficient Risk Sharing in Settlement Mechanism," Discussion Papers 3, Meisei University, School of Economics.
    • Handle: RePEc:mei:wpaper:3
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    References listed on IDEAS

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    1. Forges, Francoise & Minelli, Enrico & Vohra, Rajiv, 2002. "Incentives and the core of an exchange economy: a survey," Journal of Mathematical Economics, Elsevier, vol. 38(1-2), pages 1-41, September.
    2. Lacker, Jeffrey M., 2004. "Payment system disruptions and the federal reserve following September 11, 2001," Journal of Monetary Economics, Elsevier, vol. 51(5), pages 935-965, July.
    3. Gabriele Galati, 2002. "Settlement risk in foreign exchange markets and CLS Bank," BIS Quarterly Review, Bank for International Settlements, December.
    4. Rochet, Jean-Charles & Tirole, Jean, 1996. "Interbank Lending and Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 733-762, November.
    5. Hiroshi Fujiki & Edward J. Green & Akira Yamazaki, 1999. "Sharing the risk of settlement failure," Working Papers 594, Federal Reserve Bank of Minneapolis.
    6. Neil Wallace, 1996. "Narrow banking meets the Diamond-Dybvig model," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 20(Win), pages 3-13.
    7. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-1138, December.
    8. Michael J. Fleming & Kenneth D. Garbade, 2005. "Explaining settlement fails," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 11(Sep).
    9. Tatsuro Ichiishi & Akira Yamazaki, 2006. "Cooperative Extensions of the Bayesian Game," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 5845, December.
    10. Ruilin Zhou, 2000. "Understanding intraday credit in large-value payment systems," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 25(Q III), pages 29-44.
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    Cited by:

    1. Robert A. Eisenbeis, 2007. "Home Country Versus Cross-Border Negative Externalities in Large Banking Organization Failures and How to Avoid them," World Scientific Book Chapters, in: Douglas D Evanoff & George G Kaufman & John R LaBrosse (ed.), International Financial Instability Global Banking and National Regulation, chapter 13, pages 181-200, World Scientific Publishing Co. Pte. Ltd..
    2. Yoshiaki Hoshino & Ryuichiro Ishikawa & Akira Yamazaki, 2013. "Unequal Distribution of Powers in a Wicksellian Transfer Game," Discussion Papers 24, Meisei University, School of Economics.
    3. Hiroshi Fujiki, 2013. "Policy Measures to Alleviate Foreign Currency Liquidity Shortages under Aggregate Risk with Moral Hazard," The Japanese Economic Review, Japanese Economic Association, vol. 64(4), pages 504-536, December.
    4. Akira Yamazaki, 2013. "Production Atomless Economies," Discussion Papers 25, Meisei University, School of Economics.
    5. Charles M. Kahn & William Roberds, 2009. "Payments Settlement: Tiering in Private and Public Systems," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(5), pages 855-884, August.
    6. Tomura, Hajime, 2018. "Payment instruments and collateral in the interbank payment system," Journal of Economic Theory, Elsevier, vol. 178(C), pages 82-104.
    7. Schulz, Christian, 2011. "Liquidity requirements and payment delays - participant type dependent preferences," Working Paper Series 1291, European Central Bank.
    8. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
    9. Kocherlakota, Narayana & Wright, Randall, 2008. "Introduction to monetary and macro economics," Journal of Economic Theory, Elsevier, vol. 142(1), pages 1-4, September.
    10. Tore Nilssen, 2011. "Risk externalities in a payments oligopoly," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 10(3), pages 211-234, December.

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