Will that be Cash, Check, or Debit? The Decision to Use Alternative Payment Methods: State Dependence or Unobserved Heterogeneity?

This paper investigates the household decision to adopt alternative payment technologies (financial innovation); examples of financial innovation are interest-bearing checking accounts, credit cards, and ATM cards. The obvious advantage of these payments tools is that they allow households to economize on their money holdings while still providing liquidity services. Through technological progress, the use of paper and coin currency has become almost unnecessary. However, studies by Humphrey, Pulley, and Vesala (1996), Evans and Schmalensee (1999), and Stavins (2001) have shown that large segments of the population in Europe, North America, and Japan have yet to adopt financial innovation. This paper looks at these issues by using the Bank of Italy Survey of Household Income and Wealth and applying discrete-choice dynamic panel data techniques. Identifying the root cause of adoption (or lack of) is a non-trivial task. One of the major task is to distinguish between true state dependence and unobserved heterogeneity. Preliminary evidence indicates that state dependence plays a role in the adoption decision.