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Why banks should keep secrets

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  • Todd Kaplan

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Abstract

We show that it is sometimes efficient for a bank to commit to a policy that keeps information about its risky assets private. Our model, based upon Diamond-Dybvig (1983), has the feature that banks acquire information about their risky assets before depositors acquire it. A bank has the option of using contracts where the middle-period return on deposits is contingent on this information, but by doing so it must also reveal the information. We derive the conditions on depositors’ preferences and banking technology for which a bank would prefer to keep information secret even though it must then use a non-contingent deposit contract. Copyright Springer-Verlag Berlin/Heidelberg 2006

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File URL: http://hdl.handle.net/10.1007/s00199-004-0597-y
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 27 (2006)
Issue (Month): 2 (January)
Pages: 341-357

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Handle: RePEc:spr:joecth:v:27:y:2006:i:2:p:341-357

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Keywords: Deposit contracts; Interim information.;

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References

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  1. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
  2. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-61, July.
  3. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
  4. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  5. Ted Temzelides & Bernandino Adao, 1995. "Beliefs, Competition, and Bank Runs," Finance 9511001, EconWPA.
  6. Gorton, Gary, 1985. "Bank suspension of convertibility," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 177-193, March.
  7. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Roger B. Myerson, 1981. "Mechanism Design by an Informed Principal," Discussion Papers 481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Citations

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Cited by:
  1. Balkenborg, Dieter & Kaplan, Todd R. & Miller, Tim, 2009. "Teaching Bank Runs with Classroom Experiments," MPRA Paper 18635, University Library of Munich, Germany.
  2. David Andolfatto & Fernando M. Martin, 2012. "Information disclosure and exchange media," Working Papers 2012-012, Federal Reserve Bank of St. Louis.
  3. Stenzel, A. & Wagner, W.B., 2013. "Asset Opacity and Liquidity," Discussion Paper 2013-066, Tilburg University, Center for Economic Research.
  4. Todd Kaplan, 2012. "Communication of preferences in contests for contracts," Economic Theory, Springer, vol. 51(2), pages 487-503, October.
  5. Surajeet Chakravarty & Miguel A. Fonseca & Todd Kaplan, 2012. "An Experiment on the Causes of Bank Run Contagions," Discussion Papers 1206, Exeter University, Department of Economics.
  6. Frank Gigler & Thomas Hemmer, 2008. "On the welfare effects of allowing unlimited renegotiation in agency relationships," Economic Theory, Springer, vol. 37(2), pages 243-265, November.

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