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The Term-Structure of Investment and the Banks' Insurance Function

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Author Info
Ernst-Ludwig VON THADDEN

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Abstract

The article re-examines the proposition, first formulated by Bryant (1980) and Diamond and Dybcvig ( 1983), that in a production economy with stochastic liquidity shocks to the household sector, banks serve to provide optimal intertemporal insurance to consumers. The paper argues that in order to understand the moral hazard problems inherent in this insurance problem, it is too narrow to consider solely the role of banks as providers of liquidity. The paper develops a model with several investment opportunities in which banks have the additional function of asset diversification.

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Publisher Info
Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 9606.

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Length: 22 pages
Date of creation: Feb 1996
Date of revision:
Publication status: Published in European Economic Review, vol. 41 (7), July 1997, pp. 1355-1374
Handle: RePEc:lau:crdeep:9606

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.65
Web page: http://www.hec.unil.ch/deep/publications-english/e-cahiers.htm

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Related research
Keywords: banks; intermediation liquidity; maturity transformation; banks runs; incentive compatibility; diversification;

Other versions of this item:

Find related papers by JEL classification:
D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
G20 - Financial Economics - - Financial Institutions and Services - - - General
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

Cited by:
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  1. Falko Fecht & Antoine Martin, 2005. "Banks, Markets, and Efficiency," Finance 0507017, EconWPA. [Downloadable!]
    Other versions:
  2. Matias Fontenla, 2004. "Banks and Capital Inflows," Econometric Society 2004 Latin American Meetings 272, Econometric Society. [Downloadable!]
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This page was last updated on 2009-11-22.

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