Production, hidden action, and the payment system

Using a modified version of Freeman's (1996) payment system model, the optimal intraday rate is examined. The production set is modified to account for a non-degenerate distribution of settlements within a day. In addition to the modified production set, the consumption set is modified. A positive intraday interest rate may be able to implement the planner's allocation.

► Linking production outcomes to settlement endogenizes the distribution of intraday payments. ► Linking consumption timing to settlement requests affects the optimal intraday rate. ► Deriving conditions under which the optimal intraday rate is positive.