A significant part of payment system activity is and historically has been conducted through private, multilateral arrangements among banks. Such arrangements arise in response to the network characteristics of payment systems. Network characteristics, some observers believe, are a source of market failure that prevents private initiatives from achieving economic efficiency. This conclusion derives from a theoretical approach that takes the organization of private arrangements as given. A theory that instead seeks to explain how private arrangements emerge in network markets has very different implications.
Amanda L. Kramer
Order single copies or subscribe to Economic Quarterly and other publications from the Federal Reserve System.