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Mechanism design and Payments

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Listed:
  • Ted Temzelides

    (University of Pittsburgh)

  • Cyril Monnet

    (European Central Bank)

  • Thor Koeppl

    (Queens University)

Abstract

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.

Suggested Citation

  • Ted Temzelides & Cyril Monnet & Thor Koeppl, 2007. "Mechanism design and Payments," 2007 Meeting Papers 23, Society for Economic Dynamics.
    • Handle: RePEc:red:sed007:23
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    Cited by:

    1. Koeppl, Thorsten & Monnet, Cyril & Temzelides, Ted, 2008. "A dynamic model of settlement," Journal of Economic Theory, Elsevier, vol. 142(1), pages 233-246, September.
    2. Huberto M. Ennis & John A. Weinberg, 2007. "Interest on reserves and daylight credit," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 93(Spr), pages 111-142.
    3. Benjamin Lester, 2006. "A Model of Interbank Settlement," 2006 Meeting Papers 282, Society for Economic Dynamics.

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