Essays in the economics of payments

Abstract

This thesis contains three independent essays studying cash management and payment method choices by households through structural inventory-thoretical models. The first chapter, joint with Francesco Lippi, builds on novel data on payment method choices by Euro Area households, presenting stylized facts which are at odds with the predictions of existing models. Cash does not always burn in consumers’ hands: individuals often pay using cards even when they have enough cash on hand, especially when the transaction faced is large and paying cash would deplete cash balances. We show that non-universal acceptance of cards by merchants generates a precautionary motive for holding cash. We rationalize our findings through an inventory model with a means of payment choice, lumpy purchases and imperfect acceptance of cards. We calibrate our model to match aggregate statistics for the Euro Area in the 2015-2022 period, and use it to quantify the welfare loss due to imperfect acceptance, the benefit of holding cards, and to evaluate conditions under which a cashless society can emerge. The second chapter investigates the determinants of large regional differences in cash holdings and in the intensity of card usage within the Euro Area. After documenting that such differences emerge as a combination of supply-side determinants (merchants’ acceptance) and demand-side factors (behavioral differences in withdrawal and unforced payment choices), I present a quantitative model of payment choices and cash management, and I estimate its parameters at the regional level to decompose the cross-regional variation in behavior into its components. Results show that supply-side differences in merchant acceptance only explain a small portion of regional gaps, while the dispersion in cash holding and withdrawal costs, as well as in households’ preferences play a large role. The third chapter, joint with Silvio Sorbera, studies a model of the payments market where cash management and payment choices by buyers and card acceptance decisions by sellers are jointly determined in equilibrium. Buyers decide how much cash to hold, while sellers choose whether to accept payment cards in their shop or not. We characterize equilibria and perform comparative statics exercises. We then build and calibrate a more realistic version of the model which embeds a dynamic cash management problem for buyers, and show how policy experiments (e.g., a subsidy to card usage) may yield different results in our model with respect to a partial equilibrium framework in which the share of merchants accepting cards is taken as given.