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Why Banks Should Keep Secrets

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Author Info

  • Kaplan, T.R.

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. Banks have the option of using contracts where the middle-period return on deposits is contingent on this information, but by doing so they must also reveal the information. We derive the conditions on depositors' preferences and bankers' technology for which banks would prefer to keep information secret even though they must then use non-contingent deposit contracts.

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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 0014.

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Length: 20 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:exe:wpaper:0014

Contact details of provider:
Postal: Streatham Court, Rennes Drive, Exeter EX4 4PU
Phone: (01392) 263218
Fax: (01392) 263242
Web page: http://business-school.exeter.ac.uk/about/departments/economics/
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Related research

Keywords: CONTRACTS ; INFORMATION ; BANKS;

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References

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  1. Bernadino Adao & Theodosios Temzelides, 1995. "Beliefs, competition, and bank runs," Working Papers 95-26, Federal Reserve Bank of Philadelphia.
  2. 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.
  3. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
  4. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. 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.
  6. Gorton, Gary, 1985. "Bank suspension of convertibility," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 177-193, March.
  7. Roger B. Myerson, 1981. "Mechanism Design by an Informed Principal," Discussion Papers 481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Bernardino Adao & Ted Temzelides, 1998. "Sequential Equilibrium and Competition in a Diamond-Dybvig Banking Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 859-877, October.
  9. 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.
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Citations

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Cited by:
  1. David Andolfatto & Fernando Martin, 2013. "Information Disclosure and Exchange Media," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 527-539, July.
  2. Kaplan, Todd R, 2008. "Communication of Preferences in Contests for Contracts," MPRA Paper 18696, University Library of Munich, Germany, revised 08 Aug 2009.
  3. Dieter Balkenborg & Todd Kaplan & Timothy Miller, 2011. "Teaching Bank Runs with Classroom Experiments," The Journal of Economic Education, Taylor & Francis Journals, vol. 42(3), pages 224-242, July.
  4. Stenzel, A. & Wagner, W.B., 2013. "Asset Opacity and Liquidity," Discussion Paper 2013-066, Tilburg University, Center for Economic Research.
  5. 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.
  6. 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.

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