Working Paper: NBER ID: w21110
Authors: Fernando Alvarez; Francesco Lippi
Abstract: We present a model that characterizes the relationship between optimal dynamic cash management and the choice of the means of payment. The novel feature of the model is the sequential nature of the payments choice: in each instant the agent can choose to pay with either cash or credit. This framework predicts that the current level of the stock of cash determines whether the agent uses cash or credit. Cash is used whenever the agent has enough of it, credit is used when cash holdings are low, a pattern recently documented by households data from several countries. The average level of cash and the average share of expenditures paid in cash depend on the opportunity cost of cash relative to the cost of credit. The model produces a rich set of over-identifying restrictions for consumers’ cash-management and payment choices which can be tested using recent households survey and diary data.
Keywords: Cash Management; Payment Choice; Dynamic Model
JEL Codes: E41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cash holdings (E41) | choice of payment method (E42) |
| cash availability (E41) | payment instrument choice (E42) |
| technological innovations (ATM networks) (O39) | payment choices (E42) |
| larger cash balances (E41) | likelihood of cash usage (E41) |
| cash holdings (E41) | share of payments made in cash (G35) |
| ratio of withdrawal size to average cash holdings (E41) | share of payments made in cash (G35) |