Friday, October 5, 2012: 10:00 AM
A service with network economies can provide large benefits to providers and users, but network economies can also make efforts to replace old technology difficult. An innovation will be preferred to the existing technology only if sufficient numbers of providers and users adopt it. In such cases, there may be a role for market intervention to facilitate a transition. However, imposing regulations mandating the use of new
technology may impose high costs on some market participants, but
alternatively, if the intervention has too light a touch the transition may
be delayed or postponed indefinitely, foregoing its benefits. Where
possible, providing for interoperability of the old and new technologies
can ease the transition by lowering the cost of adoption. And as more
agents adopt, more network economies transfer to the new technology,
increasing incentives for non-adopters to switch, accelerating adoption.
By allowing agents, in this case banks, to choose to use the old or new
technology through the use of an object called a substitute check, the
Check 21 legislation struck a balance between encouraging the adoption of
new technology and ensuring that the costs of doing so are outweighed by
the benefits. Our empirical analysis of adoption of the new technology
shows that, in a sense, the banking industry was able to implement a
dynamic Pareto optimal adjustment to the new equilibrium in a surprisingly
short period of time. The transition was encouraged by incentive-based
pricing policies of competing central clearinghouses. The incentives
allowed network economies to develop in the new technology more quickly
than otherwise might have happened. The experience demonstrates a
regulatory pathway to an optimal adjustment from a bad equilibrium to a
good one by a careful lifting of a constraint without undue imposition of
high adjustment costs on agents with relatively low value of using the new
technology and without providing a direct subsidy.
technology may impose high costs on some market participants, but
alternatively, if the intervention has too light a touch the transition may
be delayed or postponed indefinitely, foregoing its benefits. Where
possible, providing for interoperability of the old and new technologies
can ease the transition by lowering the cost of adoption. And as more
agents adopt, more network economies transfer to the new technology,
increasing incentives for non-adopters to switch, accelerating adoption.
By allowing agents, in this case banks, to choose to use the old or new
technology through the use of an object called a substitute check, the
Check 21 legislation struck a balance between encouraging the adoption of
new technology and ensuring that the costs of doing so are outweighed by
the benefits. Our empirical analysis of adoption of the new technology
shows that, in a sense, the banking industry was able to implement a
dynamic Pareto optimal adjustment to the new equilibrium in a surprisingly
short period of time. The transition was encouraged by incentive-based
pricing policies of competing central clearinghouses. The incentives
allowed network economies to develop in the new technology more quickly
than otherwise might have happened. The experience demonstrates a
regulatory pathway to an optimal adjustment from a bad equilibrium to a
good one by a careful lifting of a constraint without undue imposition of
high adjustment costs on agents with relatively low value of using the new
technology and without providing a direct subsidy.