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Working Papers

November 2000, No. 00-11

Incentives, Communication, and Payment Instruments

Edward S. Prescott and John A. Weinberg

Alternative payment instruments are studied in an economy with private information, delayed communication, and limited commitment. Attention is restricted to checks and bank drafts, which differ in resource cost and communication characteristics. Checks are less costly but settlement delays create a limited commitment constraint. We find that drafts dominate at low wealths and checks at higher wealths. Applications to 19th century and modern payment systems are discussed.

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