The Decision to Adopt Alternative Payment Methods : Testing for the Role of State Dependence

Many have predicted that through technological progress, the use of paper and coin currency would become almost obsolete. The obvious advantage of these payments technologies, i.e. interest-bearing bank accounts and ATM/debit cards, is that they allow households to economize on their money holdings while still providing liquidity services. However, studies by Humphrey, Pulley, and Vesala (1996), Evans and Schmalansee (1999), Mulligan and Sala-i-Martin (2000), and Stavins (2001) have shown that large segments of the population in Europe, North America, and Japan have yet to adopt financial innovation. One major reason used to explain the low adoption rates are the role of fixed costs involved with adopting financial innovation. This paper investigates the role of fixed costs in the household decision to adopt alternative payment technologies (i.e. interest-bearing bank accounts and ATM/debit cards). These issues are investigated by applying discrete-choice dynamic panel data techniques to the Bank of Italy Survey of Household Income and Wealth dataset in order to test for the presence of fixed costs or state dependence. One of the major obstacles is distinguishing between true state dependence and unobserved heterogeneity. The empirical evidence indicates that state dependence/fixed costs play a role in the adoption decision