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Demand Deposit Contracts, Suspension of Convertibility, and Optimal Financial Intermediation

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  • Villamil, A P
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    Abstract

    This paper establishes that an optical contract, combining features of well-known Diamond and Dybvig (1983) and Townsend (1979,1983) models, resembles banking. The contract and the associated allocations are derived from a social planner's problem which contains the Diamond and Dybvig and Townsend models as sub-problems. The analysis accomplishes the following. It unites the liquidity preference and cost minimization literatures in a simple way; resolves the demand deposit/demand equity problem in the Diamond and Dybvig model; introduces a notion of efficient bankruptcies into the liquidity preference literature; and raises some questions about the government regulation vs. laissez faire banking debate.

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    Bibliographic Info

    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 1 (1991)
    Issue (Month): 3 (July)
    Pages: 277-88

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    Handle: RePEc:spr:joecth:v:1:y:1991:i:3:p:277-88

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    Web page: http://link.springer.de/link/service/journals/00199/index.htm

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    Cited by:
    1. De Nicolo, Gianni, 1996. "Run-proof banking without suspension or deposit insurance," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 377-390, October.
    2. Temzelides, Theodosios, 1997. "Evolution, coordination, and banking panics," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 163-183, September.
    3. Huberto M. Ennis & Todd Keister, 2009. "Bank Runs and Institutions: The Perils of Intervention," American Economic Review, American Economic Association, vol. 99(4), pages 1588-1607, September.
    4. Huberto M. Ennis & Todd Keister, 2007. "Commitment and equilibrium bank runs," Staff Reports 274, Federal Reserve Bank of New York.
    5. Gangopadhyay, Shubhashis & Singh, Gurbachan, 2000. "Avoiding bank runs in transition economies: The role of risk neutral capital," Journal of Banking & Finance, Elsevier, vol. 24(4), pages 625-642, April.

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