SC Connecticut News

Economists and policymakers often view cash as problematic due to its association with tax evasion, criminal activities, and lack of interest accrual for savings. These concerns have fueled arguments for demonetization, like India's 2016 removal of large-denomination banknotes. However, cash offers benefits such as widespread acceptance, privacy, and economic inclusion for those without access to banking services.

A recent study by David Argente from Yale SOM and Fernando Alvarez from the University of Chicago uses real-world experiments in Mexico to evaluate the value of these benefits through Uber rides. They found that riders would pay a 50% premium to maintain the option to pay with cash. This suggests that banning cash payments would significantly reduce consumer surplus—the benefits people derive from using cash.

Argente states that if considering whether to eliminate cash, both costs and benefits must be weighed: "The benefits might be reductions in crime...but the cost of getting rid of cash is all of this consumer surplus."

The study was motivated by varying regulations on Uber's payment methods across Mexican cities. In some areas where cash payments were banned, Uber filed lawsuits leading to a 2018 Supreme Court ruling against Colima's ban on grounds of financial inclusion.

Through experiments involving discounts and incentives, researchers examined how likely customers were to switch payment methods. Findings indicated that mixed users struggled to substitute card payments for cash due to factors like bank account balances or receiving wages in cash.

Additional data from Panama showed a decline in Uber usage when driver licensing requirements doubled ride prices. A similar pattern was observed in Puebla after a 2017 ban led many users to register cards instead.

The research estimates an overall loss in consumer benefits equivalent to 50% of annual Uber expenditures per rider if a cash ban were enforced. Those who rely solely on cash spend about $80 annually on Uber rides; thus, their loss equates to $40 worth of benefits.

Argente concludes that banning cash could be costly in developing countries heavily reliant on it: "We should not do it in developing countries...but instead focus such efforts on higher-income countries." While Sweden has transitioned successfully towards a near-cashless economy, Argente notes minimal crime reduction from eliminating cash elsewhere.

He advises studying nations like Brazil and Kenya with prevalent digital payment systems before attempting similar transitions: "Overall...getting rid of cash will bring more costs than benefits at this point."