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Incorporating a "public good factor" into the pricing of large-value payment systems

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  • Holthausen, Cornelia
  • Rochet, Jean-Charles

Abstract

We study optimal pricing rules for a public large-value payment system (LVPS) that produces a public good (like prevention of systemic risk) but faces competition by a private LVPS for the private provision of large value payments. We show that the marginal cost of the public LVPS has to be corrected by a "public good factor"that can be interpreted alternatively as the decrease in the cost of providing the public good when the private activity of the public system increases, or as the subsidy needed for private banks to internalize the cost of systemic risk. In either interpretation, the public good factor is easy to measure: it corresponds to the subsidy needed for private banks to allocate their payments in the way that is desired by banking authorities. JEL Classification: G28, H41

Suggested Citation

  • Holthausen, Cornelia & Rochet, Jean-Charles, 2005. "Incorporating a "public good factor" into the pricing of large-value payment systems," Working Paper Series 507, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2005507
    Note: 253388
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    References listed on IDEAS

    as
    1. Philippe Choné & Laurent Flochel & Anne Perrot, 1999. "Allocating and Funding Universal Service Obligations in a Competitive Network Market," Working Papers 99-55, Center for Research in Economics and Statistics.
    2. Chone, Philippe & Flochel, Laurent & Perrot, Anne, 2002. "Allocating and funding universal service obligations in a competitive market," International Journal of Industrial Organization, Elsevier, vol. 20(9), pages 1247-1276, November.
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    Cited by:

    1. Craig, Ben & Fecht, Falko, 2011. "Substitution between net and gross settlement systems: A concern for financial stability?," Discussion Paper Series 1: Economic Studies 2011,16, Deutsche Bundesbank.

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    More about this item

    Keywords

    large-value payment systems; pricing rules; public goods;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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