Working Paper 99-5
by Gautam Gowrisankaran and Joanna Stavins

We seek to determine the presence and causes of network externalities for the automated clearinghouse (ACH) electronic payments system, using a monthly panel data set on individual bank adoption of ACH. We construct a model of ACH usage that shows how to separately identify network externalities from technological advancement and peer-group effects. We find significant evidence of network effects and find evidence that these network effects are not internalized. Moreover, a large part of these network effects is due to informational problems. Sunk costs of adoption appear to be low.

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