Transferability, finality, and debt settlement

Charles M. Kahn, William Roberds

Research output: Contribution to journalArticlepeer-review

Abstract

Payment, fundamental to exchange in a decentralized economy, often takes the form of transfers of inside money, i.e., specialized forms of debt. Associated with each type of inside money is a set of rules that governs both the legitimacy of such transfers as means of extinguishing other debts, and the allocation of the ensuing risks. In this paper we develop a model of debt as inside money. In a simple mechanism design framework we show that transferable debt that can be used to settle other debt obligations with finality can be a welfare improving arrangement in the presence of limited enforcement powers. Transferable debt has two advantages over simple chains of credit: it allows for removal of less-than-perfectly reliable agents from the chain in a timely fashion, and it allows agents to direct payments to the proper party without direct communication with other members of the credit chain.

Original languageEnglish (US)
Pages (from-to)955-978
Number of pages24
JournalJournal of Monetary Economics
Volume54
Issue number4
DOIs
StatePublished - May 1 2007

Keywords

  • Finality
  • Inside money
  • Mechanism design
  • Negotiability
  • Settlement
  • Transferability

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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