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A Model of Tiered Settlement Networks
Author(s) -
CHAPMAN JAMES,
CHIU JONATHAN,
MOLICO MIGUEL
Publication year - 2013
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12004
Subject(s) - settlement (finance) , clearing , payment , intermediation , welfare , business , economies of scale , economics , public economics , microeconomics , finance , market economy
Payment and settlement networks typically involve various tiers of intermediation. This paper develops a model of settlement system to study the endogenous structure of tiered settlement networks, and the welfare consequences of clearing agent (CA) failure. We offer two explanations for tiering: private information regarding participant’s credit worthiness and economies of scale in the participation in the settlement system. CAs play a monitoring and cost‐saving role in the settlement network. As a result, a failure of a CA can lead to a large and persistent welfare loss to the economy.