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Diamond and Dybvig's classic theory of financial intermediation : what's missing?

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Author Info
Edward J. Green
Ping Lin

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Abstract

The article shows that in a finite-trader version of the Diamond and Dybvig model (1983), the ex ante efficient allocation can be implemented as a unique equilibrium. This is so even in the presence of the sequential service constraint, as emphasized by Wallace (1988), whereby the bank must solve a sequence of maximization problems as depositors contact it at different times. A three-trader example with constant relative risk-aversion utility is used in order to illustrate clearly the requirements that the sequential service constraint imposes on implementation.

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Publisher Info
Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (2000)
Issue (Month): Win ()
Pages: 3-13
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Handle: RePEc:fip:fedmqr:y:2000:i:win:p:3-13:n:v.24no.1

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Related research
Keywords: Bank failures;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Williamson, Stephen D, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 135-45, February. [Downloadable!] (restricted)
    Other versions:
  2. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  3. Edward J. Green & Ping Lin, 1996. "Implementing efficient allocations in a model of financial intermediation," Working Papers 576, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23. [Downloadable!]
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ting-Fang Chiang & E-Ching Wu & Min-Teh Yu, 2007. "Premium setting and bank behavior in a voluntary deposit insurance scheme," Review of Quantitative Finance and Accounting, Springer, vol. 29(2), pages 205-222, August. [Downloadable!] (restricted)
  2. Guido Cozzi & Paolo Giordani, 2004. "Uncertainty Averse Bank Runners," Working Papers 71, Sapienza University of Rome, Department of Public Economics. [Downloadable!]
    Other versions:
  3. repec:bep:eaptop:v:7:y:2007:i:1:p:1720-1720 is not listed on IDEAS
  4. repec:bep:mactop:v:3:y:2003:i:1:p:1052-1052 is not listed on IDEAS
  5. Guilherme Carmona, 2004. "On the Existence of Equilibrium Bank Runs in a Diamond-Dybvig Environment," Finance 0404009, EconWPA. [Downloadable!]
    Other versions:
  6. Margarita Samartín, 2004. "Algunos Temas Relevantes En La Teoría Bancaria," Documentos de Trabajo de Economía de la Empresa db040403, Universidad Carlos III, Departamento de Economía de la Empresa. [Downloadable!]
  7. Enrique Kawamura, 2000. "Banks with Peso-Dominated Deposits in Small Open Economies with Aggregate Liquidity Shocks," Working Papers 27, Universidad de San Andres, Departamento de Economia, revised Jun 2002. [Downloadable!]
  8. Gerald P. Dwyer, Jr. & Margarita Samartín, 2006. "Why do banks promise to pay par on demand?," Working Paper 2006-26, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  9. Huberto M. Ennis & Todd Keister, 2008. "Run equilibria in a model of financial intermediation," Staff Reports 312, Federal Reserve Bank of New York. [Downloadable!]
  10. Chao Gu, 2007. "Herding and Bank Runs," Working Papers 0716, Department of Economics, University of Missouri. [Downloadable!]
  11. Gu, Chao, 2007. "Herding and Bank Runs," Working Papers 07-15, Cornell University, Center for Analytic Economics. [Downloadable!]
  12. Proto, Eugenio, 2005. "Growth expectations and banking system fragility in developing economies," BOFIT Discussion Papers 13/2005, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  13. Carmona, Guilherme & Leoni, Patrick, 2003. "Equilibrium Non-Panic Bank Failures," FEUNL Working Paper Series wp424, Universidade Nova de Lisboa, Faculdade de Economia. [Downloadable!]
  14. SHerrill Shaffer, 2008. "Strategic Risk Aversion," CAMA Working Papers 2008-25, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
  15. Huberto M. Ennis & Todd Keister, 2007. "Bank runs and institutions : the perils of intervention," Working Paper 07-02, Federal Reserve Bank of Richmond. [Downloadable!]
  16. Huberto M. Ennis & Todd Keister, 2007. "Commitment and equilibrium bank runs," Staff Reports 274, Federal Reserve Bank of New York. [Downloadable!]
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