A model of tiered settlement network

The degree of tiering is decreasing in the fixed cost of operating the second-tier network and the availability of public credit history. [...] Our model builds on two basic compo- nents: private information regarding participants’ credit-worthiness, and economies of scale in the participation of the settlement system.2 In the model, the economy consists of a trad- ing sector and a settlement sector. [...] Second, the degree of tiering is decreasing in the fixed cost of operating the second-tier network and the availability of public credit history. [...] Section (4) derives the welfare effects of clearing agent failure and decomposes the welfare cost of the failure and section (5) concludes the paper. [...] If all the public agents choose to become 21 indirect clearers by attaching to clearing agents, then the number of clients per clearing agents is given by N −M n =. (1) A Since small agents make take-it-or-leave-it offers to clearing agents, the equilibrium interme- diation fee, φ, should be equal to the marginal cost of serving the indirect clearers: ′ N −M φ = η ( ). (2) A The free entry conditi