Cash: A Blessing or a curse?

Abstract

We use two quasi-natural experiments that encouraged the use of debit cards and facilitated the use of ATMs in Mexico to estimate the elasticity of crime and informality to the availability of cash as a means of payment. We then construct a simple model to quantify the private costs of restricting cash usage in the economy. Our model captures the degree of substitution between cash and other payment methods at the intensive and extensive margins. We estimate the welfare effects of restricting cash by means of three key inputs: i) the elasticity of substitution between cash and credit, ii) the share of expenditures in cash by type of good obtained from detailed micro data, and iii) the elasticity of crimes to the availability of cash as means of payment. The social benefits of restricting cash usage are driven by the reduction of some criminal activities. The costs arise from the distortions that the anti-cash regulation imposes on the individual choices regarding the means of payment. We find that the private costs of heavily taxing the use of cash in Mexico outweigh the social benefits that we identify.