The process of payment is fundamental to exchange in a decentralized economy. In production economies, payments often take 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 the authors develop a model of debt as inside money. In a simple mechanism design framework, they show the advantages of transferable debt over simple chains of credit.
JEL classification: E400, G200, K200
Key words: settlement, finality, negotiability
The authors are grateful to Roberto Chang for helpful comments, as well as to participants in seminars at the Federal Reserve Banks of Cleveland, Kansas City, New York, and Richmond, the University of Iowa, Pennsylvania State University, and the Swiss National Bank. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
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