A model of debit card as a means of payment

Young Sik Kim, Manjong Lee

    Research output: Contribution to journalArticlepeer-review

    14 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

    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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