Endogeneous clearing house formation in payment networks

Moving from the historical experience of the Free Banking Era characterizing the US banking system from 1837 to 1863, the purpose of this paper is to investigate the rationale for the endogenous emergence of a clearinghouse, that is, a centralized institution established to manage monetary payments among many economic units. To this end, we propound an agent-based network model suitable for analysing the economic dynamics which develop whenever decentralized agents must decide on the type of payment settlement that they can perform by means of coordinated optimizing behaviours. We test the model for competing settlement modes, different economic scenarios and payment networks. We find that the topology and the density of the payment network influence the choice of agents as much as the interest rate and the probability that the clearinghouse will fail.