The effect of rounding on payment efficiency

Theory predicts that dismissing the 1 and 2 euro cent coins from the denominational range of the euro facilitates payment efficiency. To examine whether this theory holds true in practice, data were collected for the Netherlands before and after September 2004, which marks the day that retail stores were allowed to round all amounts at 5 euro cents. The data consist of wallet contents for three cross sections of individuals. As the amounts of various coins in wallets are correlated, a multivariate Poisson-log Normal model is proposed to analyze these data. It is found that rounding leads to less 1 and 2 cent coins in wallets, but that still other coins are over or underrepresented, thereby suggesting that the euro range does not yet lead to fully efficient payment behavior.