Payments systems design in deterministic and private information environments (Q5947397)

Two related models which capture different aspects of payments system design are considered. In a deterministic model with spatial separation and an absence-of-double coincidence problem, it is shown how a payments system can improve efficiency by substituting for currency transactions. This model illustrates the role of net settlement systems and shows why, in an environment without risk, imposing settlement is inefficient. In a random matching model with private information it is modeled an efficient payments system as a solution to a social planner's dynamic contracting problem. Credit arrangements and insurance within the payments system are key to mitigating the incentive problems implied by private information. Key elements of an efficient payments system are credit limits and insurance against the inability to settle transactions.