Will privacy concerns prolong money use?

Will privacy concerns prolong money use?

As the cost of credit-based payment systems continues to decline, some economists argue that money will gradually fall into disuse. But money affords one function that credit-based payment systems do not: It preserves the purchaser’s privacy. Money’s role as an imperfect recorder of transactional histories is a strength when the purchaser wishes to retain his anonymity because a purchase made with money does not reveal the purchaser’s identity as a credit purchase does. This distinction is likely to keep money in use, according to authors Charles M. Kahn, James McAndrews, and Williams Roberds.

The authors construct a model of a simple trading economy that allows for various forms of moral hazard, especially the theft of a purchaser’s identity. In a scenario in which information about a purchaser is available following a credit-based payment, the possibility of theft exists since the purchaser’s address and other information become known. Such information is not available following a cash payment. The analysis shows that in an economy with imperfect safeguards against this sort of hazard, the anonymity that money confers on the user is also its advantage, solving the problem of transactional privacy.

Despite advances in theory that cast doubt on money’s value in technologically sophisticated economies, Kahn, McAndrews, and Roberds conclude that “the ‘demotion’ of money to a poor cousin of credit-based arrangements may have been premature.”

Working Paper 2004-18

August 2004

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