A model of debit card as a means of payment

Young Sik Kim, Manjong Lee

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

This paper provides an explanation for both the rapid growth in the use of a debit card over time and the cross-sectional difference in the use of a debit card using a search-theoretic model. The trade-off between cash and a debit card as means of payment is incorporated such that a buyer incurs disutility cost proportional to the amount of cash holdings, while a seller accepting a debit card bears a fixed record-keeping cost regardless of transaction amount. As record-keeping cost decreases with the development of information technology over time, disutility cost of cash holdings required for pairwise trade eventually exceeds record-keeping cost so that all the agents with different wealth levels choose to use a debit card as a means of payment. Also, disutility cost of cash holdings required for pairwise trade would be higher for the rich than for the poor, implying the cross-sectional feature of payment pattern that the rich use a debit card more frequently than the poor. There are two distinct mechanisms that improve welfare as record-keeping cost decreases: one is to reduce deadweight loss from holding cash and the other is to reduce its distortionary effect on output produced in pairwise trade.

Original languageEnglish
Pages (from-to)1359-1368
Number of pages10
JournalJournal of Economic Dynamics and Control
Volume34
Issue number8
DOIs
Publication statusPublished - 2010 Aug 1

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Keywords

  • Cash
  • Debit card
  • Means of payment
  • Record keeping cost

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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