Banking: a mechanism design approach
AbstractThe authors study banking using the tools of mechanism design, without a priori assumptions about what banks are, who they are, or what they do. Given preferences, technologies, and certain frictions - including limited commitment and imperfect monitoring - they describe the set of incentive feasible allocations and interpret the outcomes in terms of institutions that resemble banks. The bankers in the authors' model endogenously accept deposits, and their liabilities help others in making payments. This activity is essential: if it were ruled out the set of feasible allocations would be inferior. The authors discuss how many and which agents play the role of bankers. For example, they show agents who are more connected to the market are better suited for this role since they have more to lose by reneging on obligations. The authors discuss some banking history and compare it with the predictions of their theory.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 09-26.
Date of creation: 2009
Date of revision:
Other versions of this item:
- NEP-ALL-2009-10-31 (All new papers)
- NEP-BAN-2009-10-31 (Banking)
- NEP-CTA-2009-10-31 (Contract Theory & Applications)
- NEP-MIC-2009-10-31 (Microeconomics)
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