Abstract
The purpose of this paper is to analyze the combination of institutional factors and technology advances as determinants for the choice of payment instruments. The theoretical set up suggests that countries that enter into a new institutional environment adopt the attitudes of the accepting group towards the payment choices as a consequence of institutional pressure and technology development. We apply the results of the model to the European Union enlargement process of 2004. Our findings confirm the relevance of both institutional environment and technology development in retail payment choice decisions particular to Central and Eastern European Countries.
Highlights
Continuous evolution of information technologies has led to a significant transformation of the payment industry (Evans, Schmalensse 2009)
In order to see the behavior of the ratio of cash to electronic payments, we set up a parametric example with the constant elasticity of substitution (CES) utility function: u(ct ) = lcnt1c1−t−θθ−1 for for θ =1, θ≠1 and where θ > 0 is the inverse of the elasticity of inter-temporal substitution, and the following proportional intermediation cost: γt ( j) =
Since a positive relationship between economic development and electronic payment methods is evidenced in previous studies (Humphrey 2004), we introduce economic level, proxied by gross domestic product (GDP) per worker, to control for development and economic stability
Summary
Continuous evolution of information technologies has led to a significant transformation of the payment industry (Evans, Schmalensse 2009). Of new payment methods, the existence of a corresponding technology at the disposal of consumers, explains part of the differences found in payment use in a group of developed countries. La Porta et al (1997) show the role of the institutional environment and national regulations in shaping financial market design that could influence the retail payment choice development. The paper analyzes how the process of entering an economic and monetary union could shape the evolution of consumers’ payments in newly acceded countries. It considers the role of new institutions together with the technology advances derived from that integration.
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