Cash Is King: The Role of Financial Infrastructure in Digital Adoption

Abstract

AbstractThis paper examines whether a one-time, extensive, but temporary shock to cash supply can affect the adoption of digital payments. We exploit the 2016 demonetization episode in India, which overnight discontinued 86% of cash in circulation. Using novel administrative data from retail debit card transactions, we identify a 12% increase in digital payments in areas adversely affected by the cash shortage, which persisted well after the restoration of cash supply. Examining mechanisms, we find a limited role for social networks and stronger support for learning by doing. Further, information frictions hinder the immediate adoption of digital payments. (JEL E5, 023)Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.