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Regulation and the market for checks

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  • Tumen, Semih

Abstract

This paper presents an analysis of the market for checks using the monopoly problem as an approximation. The need for such an analysis arises due to the following policy proposal: from time to time, the Turkish government considers increasing the lump-sum amount that drawee banks are legally responsible to pay per bad check. The purpose of this proposal is to ease out firms' liquidity needs especially during recessions. We show that banks will tend to restrict the quantity of checks as a response to such a policy action. We report that a percentage point increase in banks' obligation per bad check could lead up to a 1.7% decline in the total supply of checks on the margin. This means that such a policy change may harm the real economy rather than providing support. We establish that the extent of the monopoly distortion depends on three main factors: (i) the elasticity of demand for checks, (ii) how fast the fraction of bad checks increases with the total supply of checks, and (iii) the degree of preference heterogeneity.

Suggested Citation

  • Tumen, Semih, 2012. "Regulation and the market for checks," Economic Modelling, Elsevier, vol. 29(3), pages 858-867.
    • Handle: RePEc:eee:ecmode:v:29:y:2012:i:3:p:858-867
    DOI: 10.1016/j.econmod.2011.10.014
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    1. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
    2. McAndrews, James & Roberds, William, 1999. "A General Equilibrium Analysis of Check Float," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 353-377, October.
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    Cited by:

    1. Semih Tumen, 2012. "Regulating Check Use in Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 12(1), pages 1-12.

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    More about this item

    Keywords

    Checks; Regulation; Monopoly power; Preference heterogeneity;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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