Do consumers and merchants use the most efficient payment instruments? I examine how inter-change fees, which are fees paid from merchants' banks to consumers' banks when card transactions take place, influence the choice between cash and payment cards. I show that when consumers do not pay...

The market for payments is an important two-sided one, where consumers benefit from increased merchant acceptance of payment cards and vice versa. The dependence between the decisions that are made on each side of the market results in various network externalities that are often discussed but...