Mechanism Design and Payments
We use mechanism design in order to study efficient arrangements when the ability of agents to perform certain welfare-improving transactions is subject to random and unobservable shocks. We study implementation via a payment system that involves assigning balances to participants and optimally adjusting these balances given their histories of transactions. Our analysis has several implications for the design of payment systems. Efficiency requires that, in order to overcome informational frictions, transactions that are subject to high monitoring costs need to be subsidized. Optimal settlement frequency should balance the fixed cost of settlement against the costs arising from providing intertemporal incentives. Settlement costs must be borne by those participants for whom certain participation constraints are slack.
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Working Paper Series
0604, European Central Bank.
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Finance and Economics Discussion Series
2005-55, Board of Governors of the Federal Reserve System (U.S.).
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International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 675-706, 05.
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- 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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