nep-pay New Economics Papers
on Payment Systems and Financial Technology
Issue of 2018‒08‒13
twenty-one papers chosen by
Bernardo Bátiz-Lazo
Bangor University

  1. The Economic Limits of Bitcoin and the Blockchain By Eric Budish
  2. Cash in Circulation and the Shadow Economy: An Empirical Investigation for Euro Area Countries and Beyond By Franz Seitz; Hans-Eggert Reimers; Friedrich Schneider
  3. The Blockchain Folk Theorem By Bruno Biais; Christophe Bisiere; Matthieu Bouvard; Catherine Casamatta
  4. Digital technology diffusion: A matter of capabilities, incentives or both? By Dan Andrews; Giuseppe Nicoletti; Christina Timiliotis
  5. Falling Through the Net: The Digital Divide in Western Australia By Steven Bond-Smith; Alan S Duncan; Daniel Kiely; Silvia Salazar
  6. The Increasing Role of Digital Technologies in Co-production By Veiko Lember
  7. Ethnic Discrimination on an Online Marketplace of Vacation Rental By Morgane Laouénan; Roland Rathelot
  8. Blockchain and Value Systems in the Sharing Economy: The Illustrative Case of Backfeed By Alex Pazaitis; Primavera De Filippi; Vasilis Kostakis
  9. Modelling the impact of social media influencers on behavioural intentions of millennials: The case of tourism in rural areas in Greece By Chatzigeorgiou, Chryssoula
  10. Money in a Mobile Age: Emerging Trends in Consumers’ Financial Practices By Taylor, Erin
  11. Financial Inclusion and Contract Terms: Experimental Evidence From Mexico By Sara G. Castellanos; Diego Jiménez Hernández; Aprajit Mahajan; Enrique Seira
  12. Comparative Advantage in Digital Trade By Alan V. Deardorff
  13. Towards Platform Defined Business – Complementarity at the Spotlight By Najda-Janoszka, Marta
  14. I offer a macroeconomic perspective on the "Reserves for All" (RFA) proposal to let the general public use electronic central bank money. After distinguishing RFA from cryptocurrencies and relating the proposal to discussions about narrow banking and the abolition of cash I propose an equivalence result according to which a marginal substitution of outside for inside money does not affect macroeconomic outcomes. I identify key conditions on bank and government (central bank) incentives for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate my analysis to common arguments in the discussion about RFA and point to inconsistencies and open questions. By Dirk Niepelt
  15. Of Gold and Paper Money By Jagjit S. Chadha
  16. Julia Cagé, Nicolas Hervé, Marie-Luce Viaud, L’information à tout prix, Ina Editions, 2017. By Antoine Machut
  17. Book review: Why Minsky matters, by L. Randall Wray, Princeton University Press, Princeton, NJ, 2015, £19.95 hardback, 288 pp. 9780691159126 By Goodhart, Charles
  18. Some Facts of High-Tech Patenting By Michael Webb; Nick Short; Nicholas Bloom; Josh Lerner
  19. AI: Intelligent machines, smart policies: Conference summary By OECD
  20. Bitcoin Bubble Trouble By Jerome L Kreuser; Didier Sornette
  21. Crowdsourced Innovation: How Community Managers Affect Crowd Activities By Lars Hornuf; Sabrina Jeworrek

  1. By: Eric Budish
    Abstract: The amount of computational power devoted to anonymous, decentralized blockchains such as Bitcoin's must simultaneously satisfy two conditions in equilibrium: (1) a zero-profit condition among miners, who engage in a rent-seeking competition for the prize associated with adding the next block to the chain; and (2) an incentive compatibility condition on the system's vulnerability to a “majority attack”, namely that the computational costs of such an attack must exceed the benefits. Together, these two equations imply that (3) the recurring, “flow”, payments to miners for running the blockchain must be large relative to the one-off, “stock”, benefits of attacking it. This is very expensive! The constraint is softer (i.e., stock versus stock) if both (i) the mining technology used to run the blockchain is both scarce and non-repurposable, and (ii) any majority attack is a “sabotage” in that it causes a collapse in the economic value of the blockchain; however, reliance on non-repurposable technology for security and vulnerability to sabotage each raise their own concerns, and point to specific collapse scenarios. In particular, the model suggests that Bitcoin would be majority attacked if it became sufficiently economically important — e.g., if it became a “store of value” akin to gold — which suggests that there are intrinsic economic limits to how economically important it can become in the first place.
    JEL: A1 D00 D53 E4 E42 G1 G12 G2 L99
    Date: 2018–06
  2. By: Franz Seitz; Hans-Eggert Reimers; Friedrich Schneider
    Abstract: We analyze the net issues of the national euro area central banks in relation to the dynamics of the shadow economy within a panel cointegration framework. Besides the total net issues, we distinguish between large, medium and small euro banknotes and take due account of other determinants of cash demand. We find a significant and positive relationship between the net issues and the size of the shadow economy only for medium notes. And this result seems to be driven by the smaller euro area countries. The use of large and small denominations is obviously not driven by the shadow economy. For comparison purposes, we also present panel results for eight non-euro area countries (Australia, Canada, Japan, Norway, Sweden, Switzerland, UK, US). For these countries, we are not able to establish an economically meaningful and statistically significant cash demand equation including the shadow economy.
    Keywords: banknotes, net issues, shadow economy, cash demand function, panel cointegration
    JEL: C23 E41 E58
    Date: 2018
  3. By: Bruno Biais (University of Toulouse 1); Christophe Bisiere (University of Toulouse); Matthieu Bouvard (McGill University); Catherine Casamatta (University of Toulouse 1)
    Abstract: Blockchains are distributed ledgers, operated within peer-to-peer networks. If reliable and stable, they could offer a new, cost effective way to record transactions, but are they? We model the proof-of-work blockchain protocol as a stochastic game and analyse the equilibrium strategies of rational, strategic miners. Mining the longest chain is a Markov perfect equilibrium, without forking, in line with Nakamoto (2008). The blockchain protocol, however, is a coordination game, with multiple equilibria. There exist equilibria with forks, leading to orphaned blocks and persistent divergence between chains. We also show how forks can be generated by information delays and software upgrades. Last we identify negative externalities implying that equilibrium investment in computing capacity is excessive.
    Keywords: blockchain, forks, proof-of-work, distributed ledger, multiplicity of equilibria, coordination game
    JEL: C73 G2 L86
    Date: 2018–01
  4. By: Dan Andrews; Giuseppe Nicoletti; Christina Timiliotis
    Abstract: Insufficient diffusion of new technologies has been quoted as one possible reason for weak productivity performance over the past two decades (Andrews et al., 2016). This paper uses a novel data set of digital technology usage covering 25 industries in 25 European countries over the 2010-16 period to explore the drivers of digital adoption across two broad sets of digital technologies by firms, cloud computing and back or front office integration. The focus is on structural and policy factors affecting firms’ capabilities and incentives to adopt -- including the availability of enabling infrastructures (such as high-speed broadband internet), managerial quality and workers skills, and product, labour and financial market settings. We identify the effects of structural and policy factors based on the difference-in-difference approach pioneered by Rajan and Zingales (1998) and show that a number of these factors are statistically and economically significant for technology adoption. Specifically, we find strong support for the hypothesis that low managerial quality, lack of ICT skills and poor matching of workers to jobs curb digital technology adoption and hence the rate of diffusion. Similarly our evidence suggests that policies affecting market incentives are important for adoption, especially those relevant for market access, competition and efficient reallocation of labour and capital. Finally, we show that there are important complementarities between the two sets of factors, with market incentives reinforcing the positive effects of enhancements in firm capabilities on adoption of digital technologies
    Keywords: diffusion, digital skills, Digital technologies, productivity
    JEL: D24 J24 O32 O33
    Date: 2018–07–30
  5. By: Steven Bond-Smith (Bankwest Curtin Economics Centre (BCEC), Curtin University); Alan S Duncan (Bankwest Curtin Economics Centre (BCEC), Curtin University); Daniel Kiely (Bankwest Curtin Economics Centre, Curtin Business School); Silvia Salazar (Bankwest Curtin Economics Centre, Curtin University)
    Abstract: New data technologies, big data analytics and intelligent software systems are transforming the way we produce, consume or distribute commodities, and increasingly, the way we access services. They are also changing the way in which we engage with our personal, social and business networks and communities. This BCEC Focus on WA report shows there are clear divides between the haves and have nots, across various measures of access, ability and affordability. At the household and individual level, we evidence clear differences along geographic, demographic and socio-economic lines, with one in four of the poorest households in Western Australia without access to the internet compared to almost all of the highest income households. Those most at risk of falling through the net in WA, and of becoming increasingly disconnected from society include: those living in the most remote areas; families at higher levels of socio-economic disadvantage; older population cohorts and low income families, including children at risk of missing out on the educational benefits of ICT. Analysis of expenditure patterns over time show that digital technologies are a necessity, particularly for those on lower incomes. The newly devised BCEC digital stress indicator identifies those households, by family composition and housing tenure, which are chiefly at risk. The BCEC Small Business Survey highlights that internet quality and coverage does vary significantly between Western Australia’s regions. The report found 26 per cent of small businesses in the South West and Pilbara regions rated the quality of their internet infrastructure as low, compared with 25 per cent in the Wheatbelt and only 11 per cent in Perth.
    Keywords: digital divide, productivity and innovation, digital transformation, digital infrastructure, internet connectivity, Western Australia, WA economy, regional connectedness, small business
    Date: 2018–08
  6. By: Veiko Lember
    Abstract: There is a new wave of digital processes, applications and “mashups” of services emerging, driven by a growing digitization of society, everincreasing computational power, social networking and related institutional innovations. Digital technology can empower individuals and substantially increase opportunities for collective co-production as well as enable more personalized and demand-driven public services. However, the conflicting interests and diverging values among stakeholders, the inability of algorithms to mirror the complexity of societies, unevenly spread technological capabilities and other factors make digital co-production a fundamentally ambiguous, open-ended and contested process. The chapter discusses how the major trends in digital technologies affect co-production and recent evidence on the topic, as well as the major risks and open issues associated with new technologies in co-production.
    Date: 2017–09
  7. By: Morgane Laouénan (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Roland Rathelot (University of Warwick [Coventry])
    Abstract: We use data from an online marketplace of vacation rentals (Airbnb) collected in 19 major cities in North America and Europe to measure discrimination against ethnicminority hosts. This market has three interesting features: the existence of a detailed reviewing system, the high frequency of transactions and the panel dimension of the data. Using the fact that ratings provide potential guests with information about the quality of a listing, we build a credible measure of statistical discrimination, following a strategy a la Altonji and Pierret (2001). Hosts from a minority ethnic group charge 16% less than other hosts in the same cities. Controlling for a rich set of characteristics reduces the ethnic price gap to 3.2%. An additional review increases the daily price more for minority than for majority hosts. Estimating the parameters of a theoretical pricing model, we find that statistical discrimination accounts for most of the price differential: 2.5 percentage points.
    Keywords: ethnic discrimination, statistical discrimination, rental market
    Date: 2017–04–26
  8. By: Alex Pazaitis; Primavera De Filippi; Vasilis Kostakis
    Abstract: This article explores the potential of the blockchain technology in enabling a new system of value that will better support the dynamics of social sharing. Our study begins with a discussion of the evolution of value perceptions in the history of economic thought. Starting with a view on value as a mechanism that defines meaningful action within a certain context, we associate the price system with the establishment of capitalism and the industrial economy. We then discuss its relevance to the information economy, exhibited as the techno-economic context of the sharing economy, and identify new modalities of value creation that better reflect the social relations of sharing. Through the illustrative case of Backfeed, a new system of value is envisioned, comprised of three layers: (a) production of value; (b) record of value; and (c) actualisation of value. In this framework, we discuss the solutions featured by Backfeed and demonstrate a conceptual economic model of blockchain-based decentralised cooperation. We conclude that the blockchain technology has the potential to enable the creation of commons-oriented ecosystems in a sharing economy.
    Date: 2017–01
  9. By: Chatzigeorgiou, Chryssoula
    Abstract: This paper examines the ways rural businesses can become attractive to millennials using the Internet and the social media. It has become evident that the prominent way to reach out to millennials is via social media accounts. Rural businesses need to use the personal relationships they develop with their customers and expand these relationships on social media. It is also apparent that traditional marketing fails to apply to small rural businesses, whereas influencer marketing becomes a valuable asset for tourism. The proposed model connects fame, image and activities with the Social Media influencer and the way the decision making of the millennials is influenced when choosing to visit a rural tourism destination, resulting to economic growth and development of rural areas.
    Keywords: Rural tourism marketing; rural economic development; social media; influencer marketing; millennials
    JEL: L83 M31 R11
    Date: 2017–12–31
  10. By: Taylor, Erin (Canela Consulting)
    Abstract: Consumer finance practices globally are undergoing a transformation due to the increased mobility of people and the technologization of finance. This increasing mobility has the potential to deliver both positive and negative effects for consumers. On the one hand, it can expand consumer choice, increase access to product information, assist with financial literacy, and improve security. On the other hand, it may increase certain social and economic issues, such as fraud, user errors, learning difficulties, stress, and financial mismanagement. This paper discusses a range of issues that increased mobility finance presents for consumers in the areas of product mobility, human mobility, and information mobility.
    Date: 2017–08–31
  11. By: Sara G. Castellanos; Diego Jiménez Hernández; Aprajit Mahajan; Enrique Seira
    Abstract: This paper provides evidence on the difficulty of expanding access to credit through large institutions. We use detailed observational data and a large-scale countrywide experiment to examine a large bank's experience with a credit card that accounted for approximately 15% of all first-time formal sector borrowing in Mexico in 2010. Borrowers have limited credit histories and high exit-risk – a third of all study cards are defaulted on or canceled during the 26 month sample period. We use a large-scale randomized experiment on a representative sample of the bank's marginal borrowers to test whether contract terms affect default. We find that large experimental changes in interest rates and minimum payments do little to mitigate default risk. We also use detailed data on purchases and payments to construct a measure of bank revenue per card and find it is generally low and difficult to predict (using machine learning methods), perhaps explaining the bank's eventual discontinuation of the product. Finally, we show that borrowers generating a favorable credit history are much more likely to switch banks providing suggestive evidence of a lending externality. Taken together these facts highlight the difficulty of increasing financial access using large formal sector financial organizations.
    JEL: D14 D18 D82 G20 G21
    Date: 2018–07
  12. By: Alan V. Deardorff (University of Michigan)
    Abstract: Digital trade takes a variety of forms, several of which are examined here with regard to whether they can be explained by comparative advantage. The five forms of digital trade considered are 1) physical products that are advertised, ordered, and/or paid for digitally, but transported by normal trade means; 2) digital products (music, movies, books, software) that are transmitted to purchasers via the internet and are most likely to be marketed and paid for via that as well; 3) services that are provided remotely by digital means; 4) data storage and computer applications accessible in the ÒcloudÓ; and 5) web platforms that serve an international audience and are supported by advertising. I argue that the first three of these can be well explained by comparative advantage, but there are problems with the last two.
    Keywords: digital trade, comparative advantage
    JEL: F1 F11
    Date: 2017–11–13
  13. By: Najda-Janoszka, Marta
    Abstract: As markets become increasingly more competitive firms systematically move away from hierarchical integrated supply chains toward fragmented networks of strategic partnerships with external partners. Business practice indicate a growing number of busi-nesses relying on the platform organizational structures. For such constructs superior pro-duct quality and customer appeal maintain necessary but it is the breadth of the ecosystem of related product and services that has become a prerequisite for success. It implies the focus on third parties, complementors, who develop and deliver diverse content to plat-forms as well as enhance platform’s generativity. Although complementary relations should be the main reference while considering the network dynamics from different angles, the attention in the extant research gravitates toward inter-platform competition with platform owners as the central object. Thus, with the objective to contribute to the emerging lite-rature on industry platforms, this conceptual article discusses main challenges concerned with orchestrating arm’s length relationships with complementors, by departing from plat-form-owner-centered approach and focusing on behavior of interdepended contributors.
    Keywords: digital platform, value capture, value creation, complements, boundary resources
    JEL: M15 O32
    Date: 2018
  14. By: Dirk Niepelt
    Date: 2018–07
  15. By: Jagjit S. Chadha (Centre for Macroeconomics (CFM); National Institute of Economic and Social Research (NIESR))
    Abstract: We consider the role of money as a means of payment, store of value and medium of exchange. I outline a number of quantitative and qualitative experiences of monetary management. Successful regimes have sprung up in a variety of surprising places, and been sustained with state (centralised) interventions. Although the link between state and money, and its standard of identity and account may be clear, particularly in earlier stages of economic development, the extent to which the state is widely felt to hold responsibility for 'sound money' is less clear in modern democracies, where there are many other public responsibilities implying on going trade-offs.
    Keywords: Money, Gold standard, Paper money, Samuelson
    JEL: B22 E02 E31
    Date: 2018–07
  16. By: Antoine Machut (Pacte, Laboratoire de sciences sociales - UPMF - Université Pierre Mendès France - Grenoble 2 - UJF - Université Joseph Fourier - Grenoble 1 - IEPG - Sciences Po Grenoble - Institut d'études politiques de Grenoble - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes)
    Abstract: Antoine Machut, V1, 30 mai 2018, revue ppw et ds Julia Cagé, Nicolas Hervé, Marie-Luce Viaud, L'information à tout prix, Ina Editions, 2017. Cet ouvrage pose un problème éminemment actuel à propos de la production d'information. Quelle est la capacité des médias à produire de l'information originale alors qu'une énorme quantité d'articles est accessible au plus grand nombre rapidement et gratuitement sur Internet ? Si les médias ne gagnent (presque) pas d'argent à produire des articles en ligne, quelle incitation économique ont-ils à produire de l'information originale, plutôt que de reprendre de l'information déjà existante ? Issu d'un projet de recherche de grande ampleur qui vise à suivre la diffusion de l'information en France, le livre est co-rédigé par une économiste (Julia Cagé), un informaticien et une informaticienne (Nicolas Hervé et Marie-Luce Viaud). Cette collaboration entre disciplines donne lieu à un ouvrage impressionnant de richesse empirique et de limpidité, malgré la haute technicité des outils employés. Les outils du big data ont permis de collecter quasi-exhaustivement les articles de presse produits en ligne en 2013. Au total, plus de 2,5 millions de documents ont été collectés, provenant de 86 médias d'actualité généraliste, dont l'Agence France Presse (AFP), de dix pure-players (médias dont le contenu est publié exclusivement en ligne), ainsi que des sites web des radios et télévisions. Les outils du machine learning leur ont ensuite permis de soumettre ce corpus à des algorithmes de détection d'événements médiatiques, de copies et de citations. L'objet de l'étude est double : il s'agit d'une part d' objectiver et d'expliquer l'ampleur des pratiques de copié-collé d'articles de presse sur Internet (et inversement la production d'informations originales). C'est l'objet des chapitres 1 à 4. Il s'agit d'autre part de lier ce constat aux modèles économiques susceptibles d'inciter les médias à produire plus ou moins d'informations originales (chapitres 5 à 7).
    Date: 2018–09–01
  17. By: Goodhart, Charles
    Abstract: Yes, Minsky does matter! He had an extraordinarily acute understanding of the interactions between banking, and finance more generally, on one side and the real economy on the other. As the author parades Minsky’s monetary analysis, partly in well-chosen quotations, I was continuously struck by the freshness, even when several decades have elapsed since his death in 1996, and the originality of his monetary analysis
    JEL: N0
    Date: 2017–01
  18. By: Michael Webb; Nick Short; Nicholas Bloom; Josh Lerner
    Abstract: Patenting in software, cloud computing, and artificial intelligence has grown rapidly in recent years. Such patents are acquired primarily by large US technology firms such as IBM, Microsoft, Google, and HP, as well as by Japanese multinationals such as Sony, Canon, and Fujitsu. Chinese patenting in the US is small but growing rapidly, and world-leading for drone technology. Patenting in machine learning has seen exponential growth since 2010, although patenting in neural networks saw a strong burst of activity in the 1990s that has only recently been surpassed. In all technological fields, the number of patents per inventor has declined near-monotonically, except for large increases in inventor productivity in software and semiconductors in the late 1990s. In most high-tech fields, Japan is the only country outside the US with significant US patenting activity; however, whereas Japan played an important role in the burst of neural network patenting in the 1990s, it has not been involved in the current acceleration. Comparing the periods 1970-89 and 2000-15, patenting in the current period has been primarily by entrant assignees, with the exception of neural networks.
    JEL: L86 O34
    Date: 2018–07
  19. By: OECD
    Abstract: This report reflects discussions at the OECD conference “AI: Intelligent Machines, Smart Policies” held in Paris on 26-27 October, 2017. After discussing the state of Artificial intelligence (AI) research – in particular ‘machine learning’ –, speakers illustrated the opportunities that AI provides to improve economies and societies, in areas ranging from scientific discovery and satellite data analysis to music creation. There was broad agreement that the rapid development of AI calls for national and international policy frameworks that engage all stakeholders. Discussions focused on the need for policy to facilitate the adoption of AI systems to promote innovation and growth, help address global challenges, and boost jobs and skills development, while at the same time establishing appropriate safeguards to ensure that AI systems are human-centric and benefit people broadly. Transparency and oversight, algorithmic discrimination and privacy abuses were key concerns, as were new liability, responsibility, security and safety questions.
    Date: 2018–08–02
  20. By: Jerome L Kreuser (ETH Zurich); Didier Sornette (ETH Zürich and Swiss Finance Institute)
    Abstract: We present a dynamic Rational Expectations (RE) bubble model of prices with the intention to evaluate it on optimal investment strategies applied to Bitcoin. Our bubble model is defined as a geometric Brownian motion combined with separate crash (and rally) discrete jump distributions associated with positive (and negative) bubbles. The RE condition implies that the excess risk premium of the risky asset exposed to crashes is an increasing function of the amplitude of the expected crash, which itself grows with the bubble mispricing: hence, the larger the bubble price, the larger its subsequent growth rate. We use the RE condition to estimate the real-time crash probability dynamically through an accelerating probability function depending on the increasing expected return. We examine the optimal investment problem in the context of the bubble model by obtaining an analytic expression for maximizing the expected log of wealth (Kelly criterion) for the risky asset and a risk-free asset. Using our bubble model on Bitcoin from 8-Jul-2013 until 19-Dec-2017 would have generated a CAGR of 140% with a maximum drawdown of 69% giving a Calmar Ratio of 2.03. It would have moved out of Bitcoin gradually since 25-Apr-2017 to be completely out on 19-Dec-2017, three days before the crash. The outperformance of the Efficient Portfolio over just investing in Bitcoin was 265%, accomplished over 117 rebalances from 08-Jul- 2013 to 20-Dec-2017. This strategy could thus afford a cost of 2.27% at each rebalancing period and still outperform investing only in Bitcoin.
    Keywords: bitcoin, financial bubbles, efficient crashes, positive feedback, rational expectation, Kelly
    JEL: C53 E47 G01 G17
    Date: 2018–03
  21. By: Lars Hornuf; Sabrina Jeworrek
    Abstract: In this study, we investigate whether and to what extent community managers in online collaborative communities can stimulate crowd activities through their engagement. Using a novel data set of 22 large online idea crowdsourcing campaigns, we find that active engagement of community managers positively affects crowd activities in an inverted Ushaped manner. Moreover, we evidence that intellectual stimulation by managers increases community participation, while individual consideration of users has no impact on user activities. Finally, the data reveal that community manager activities that require more effort, such as media file uploads instead of simple written comments, have a larger effect on crowd participation.
    Keywords: crowdsourcing, open innovation, crowdsourced innovation, crowdworking, ideation, managerial attention
    JEL: J21 J22 L86 M21 M54 O31
    Date: 2018

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