ffi cient Risk Sharing in Settlement Mechanism

The purpose of this paper is to address a question concerning risk management in continuing, multi-party, contractual, clearing and settlement arrangements through which large-value payments are typically made. We are particularly interested in the issues of incentive compatibility when a third party possesses a private information concerning the riskiness of transfers being made. If a third party possesses private information that would be of value in determining how best to settle a payment, how does the exposure of that party to the settlement risk affect the quality of information that the party chooses to provide? In this paper, we address thes question by analyzing a specific class of parametric environments of a schematic, formal, model of a settlement arrangement or a payment network. ∗This paper is an outgrowth of a project jointly started by Hiroshi Fujiki of Bank of Japan, Edward J. Green of Federal Reserve Bank of Chicago, and Akira Yamazaki of Hitotsubashi University. Any views expressed in this paper are solely those of the authors, and do not necessarily represent the Federal Reserve Bank of Chicago or the Federal Reserve System, or Hitotsubashi University. †The research leading to this paper was done while A. Yamazaki was visiting the Southern Methodist University in Dallas and the Federal Reserve Bank of Chicago. He acknowledges a support from the Tokyo Foundation for his visits. He would like to thank the both institutions for their hospitality and Professor Shlomo Weber in particular.