An Agent Based Modeling Approach to the Check Payments Among SMEs in Turkey

Abstract

Systemic risk and fragility became more important especially after the crisis of 2008. However, the burgeoning literature especially focuses on interbank and bank-firm credit networks. On the other hand, in developing countries, deferred check payments also compose another kind of credit networks and complement for the bank-firm credit lines. Check payments among SMEs even substitute for bank credits. Recent developments in Turkey offer an interesting setting in which we examine the fragility of check payment system. In this paper, we investigate whether the dramatic increase in nonpayments of checks have been due to the decline in growth or loosening of the legal sanctions. We analyze check payments using an agent based model. We can view check payments as a network structure where firms are nodes and check obligations are directed links. Firms' decision on whether paying their checks or not, depend on behavior of their neighbors and probable payoffs to their decisions. Our main finding is that lack of strict punishment can cause default cascades in check payment systems.