Excerpt
October 2024, Paper: "Software and accounting advances have led to a rapid expansion in and prolifer ation of loyalty tokens, typically bundled as part of product price. Some tokens, such as in the airline industry, already account for tens of billions of dollars and are a major contributor to revenues. An open question is whether, as technology evolves, firms will have a strong incentive to make loyalty tokens tradable, raising regulation issues, including with monetary and banking authorities. This paper argues that for the vast majority of tokens, issuing firms have a strong incentive to make them non-tradable. Our analysis builds on Rogoff and You (2023)’s study of platform currencies to study the dual problem of redeemable tokens, which are vastly more common. The core incentive for token issuance here is that an issuer can earn ahigher rate of return on the “float” (tokens issued but not yet used) than its retail customers can, much like a bank. Our main finding is that an issuer earns higher revenue by making tokens non-tradable even though the consumer would be willing to pay ahigher price for tradable tokens. We further show that an issuer with stronger market power tends to allow more frequent token redemption, and its revenue is more token-dependent. We test the model’s predictions with data on airline mileage and hotel reward programs and document consistent empirical results that align with our theory."