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Quantifying equilibrium network externalities in the ACH banking industry
Author(s) -
Ackerberg Daniel A.,
Gowrisankaran Gautam
Publication year - 2006
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2006.tb00040.x
Subject(s) - subsidy , network effect , externality , payment , welfare , business , partial equilibrium , microeconomics , panel data , construct (python library) , economics , general equilibrium theory , industrial organization , econometrics , finance , computer science , market economy , programming language
We seek to determine the causes and magnitudes of network externalities for the automated clearing house (ACH) electronic payments system. We construct an equilibrium model of customer and bank adoption of ACH. We structurally estimate the parameters of the model using an indirect inference procedure and panel data. The parameters are identified from exogenous variation in the adoption decisions of banks based outside the network and other factors. We find that most of the impediment to ACH adoption is from large customer fixed costs of adoption. Policies to provide moderate subsidies to customers and larger subsidies to banks for ACH adoption could increase welfare significantly.