Payments systems design in deterministic and private information environments

The First setup we study is a deterministic model with spatial separation w here we consider alternative payments systems institutions and their implic ations for allocation and welfare. A payments system with period-by-period settlement in outside money improves on decentralized exchange. An efficien t allocation is supported by a payments system where settlement is not impo sed. In the second model, there is random matching and unobserved productiv ity shocks and preference shocks, We explore how risk should be shared opti mally in this economy and interpret the results in terms of how actual paym ents systems should operate. (C) 2001 Academic Press.