Endogenous Credit-card Acceptance in a Model of Precautionary Demand for Money

A credit-card acceptance decision by retailers is embedded into a simple model of precautionary demand for money. The model gives a new explanation for how the use of credit-cards can differ so widely across countries. Retailers' propensity to accept cards reduces the need for buyers to hold cash as the chance of a stock-out (of cash) is reduced. When retailers make their decision with respect to credit-card acceptance they do not take into account the effect that decision has on other sellers. This externality generates multiple equilibria over some portions of the parameter space.