An Empirical Study of Cash Payments

Anytime an individual makes a cash payment, he or she needs to think about the amount to be paid, the coins and notes which are available, and the amount of change. For central banks and retail stores, it is of interest to understand how this individual choice process works. The literature of currency use concerns primarily theory, in the sense that, given certain assumptions, one can derive an optimal denomination range. There is no empirical study which deals with the actual use of coins and notes, given a specific denomination range. In this paper we present such a study, which is based on two rather unique data sets. We use descriptive statistics and a sophisticated model, which is designed for this specific purpose, to see whether two basic premises of the theories on optimal ranges are valid. In contrast to the widely accepted assumptions, we find that individuals appear not to pay efficiently and that they are also not indifferent to the use of coins and notes. In other words, some notes and coins are used less often than expected given the payment situation.

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