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Why do social networks introduce virtual currencies?

Author

Listed:
  • Gaston Giordana
  • Paolo Guarda

Abstract

This paper models how internet platforms decide whether to introduce virtual currencies. Since platforms operate two-sided markets, virtual currencies may attract users who buy goods/services as well as external firms who accept virtual currency as payment. We find that platform incentives to introduce virtual currencies depend on the distribution of wages across the population of users as well as the distribution of preferences for online activities ("digital" preferences). We use Luxembourg data from the EU Survey on Information and Communication Technologies to test model predictions on user time allocation. In particular, we identify various individual socio-economic characteristics linked to time spent on social networks. Then, we use the user net income distribution (conditional on digital preferences) to evaluate conditions determining the platform’s choice of virtual currency design.

Suggested Citation

  • Gaston Giordana & Paolo Guarda, 2019. "Why do social networks introduce virtual currencies?," BCL working papers 132, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp132
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    More about this item

    Keywords

    Private virtual currencies; social networks; retail payments;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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