Diamond and Dybvig's classic theory of financial intermediation : what's missing?
AbstractThe 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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Bibliographic InfoArticle provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.
Volume (Year): (2000)
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