Banking, incentive constraints, and demand deposit contracts with nonlinear returns (*)
AbstractThis paper presents two results regarding banking theory: (1) demand deposit contracts are essential in providing insurance against preferences shocks, as in Diamond and Dybvig (1983), if and only if the incentive compatibility conditions bind at the social optimum; and (2) for additively separable preferences with random discount factors, demand deposit contracts have the realistic feature that the interest rate paid is an increasing function of deposit balance.
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 8 (1996)
Issue (Month): 1 ()
Note: Received: February 13, 1995; revised version April 19, 1995
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- Lin, Ping, 2003. "Equivalence between the Diamond-Dybvig banking model and the optimal income taxation model," Economics Letters, Elsevier, vol. 79(2), pages 193-198, May.
- Azrieli, Yaron & Peck, James, 2012. "A bank runs model with a continuum of types," Journal of Economic Theory, Elsevier, vol. 147(5), pages 2040-2055.
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