Efficient Payments and Price Distribution

12 Pages Posted: 15 Nov 2009 Last revised: 25 Jun 2010

Yassine Bouhdaoui

Vrije Universiteit Brussel

David Bounie

Telecom ParisTech

Abel Francois

Strasbourg University, LARGE; EM Strasbourg Business School; Telecom ParisTech

Date Written: September 4, 2009

Abstract

The studies dealing with the efficiency of monetary denomination systems are usually based on a restrictive assumption: prices paid cash are assumed to be evenly distributed in the economy. Using an empirical (observed) distribution of prices in the French economy, this paper measures the losses in efficiency when using a uniform distribution of prices. We show that i. the average number of tokens used in transactions when observed prices are concerned is around two times less than that obtained when prices are evenly distributed; ii. considering a uniform distribution of prices leads to overestimate the average frequency of use of larger denominations and to underestimate the average frequency of use of lower denominations, at least the one euro denomination; iii. the probability of existence of a price, the number of occurences of a price, the proportion of lower prices and, finally, the proportion of round prices are central to explain the observed payment efficiency. At the end, the simulations provide useful clues to better understanding how and why the price distribution affects payment efficiency.

Keywords: currency denomination, monetary denomination efficiency

JEL Classification: E4, E47

Suggested Citation

Bouhdaoui, Yassine and Bounie, David and Francois, Abel, Efficient Payments and Price Distribution (September 4, 2009). Available at SSRN: https://ssrn.com/abstract=1506523 or http://dx.doi.org/10.2139/ssrn.1506523

Yassine Bouhdaoui

Vrije Universiteit Brussel ( email )

Boulevard de la Plaine 2
Ixelles, 1050
Belgium

David Bounie (Contact Author)

Telecom ParisTech ( email )

46 rue Barrault
F-75634 Paris, Cedex 13
France

Abel Francois

Strasbourg University, LARGE ( email )

47 avenue de la foret Noire
Strasbourg, 67000
France

HOME PAGE: http://abelfrancois.wordpress.com/information/

EM Strasbourg Business School ( email )

PEGE
61 avenue de la ForĂȘt Noire
Strasbourg, 67000
France

HOME PAGE: http://abelfrancois.wordpress.com/information/

Telecom ParisTech

46, rue Barrault
Paris Cedex 13, F-75634
France

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