Regulation and the Market for Checks

Title : Regulation and the Market for Checks
Number : 10/06
Author(s) : Semih Tümen
Language : English
Date : March 2010
Abstract : This paper analyzes the market for checks using the monopoly problem as an approximation. The need for such an analysis arises due to the following policy proposal: the Turkish government considers increasing the lump-sum amount that drawee banks are legally responsible to pay per bad check. We show that banks will tend to restrict the quantity of checks as a response to such a policy action. We report that a percentage increase in banks' obligation per bad check could lead up to a 1.7% decline in the total supply of checks on the margin. We establish that the extent of the monopoly distortion depends on three main factors: (i) the elasticity of demand for checks, (ii) how fast the fraction of bad checks increase with the total supply of checks, and (iii) the degree of preference heterogeneity.
Keywords : Checks, regulation, monopoly power, preference heterogeneity.
JEL Codes : D42, G28
Regulation and the Market for Checks