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A Behavioral Model of Demandable Deposits and its Implications for Financial Regulation

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  • Julio J. Rotemberg

Abstract

A model is developed which rationalizes contracts that give depositors the right to obtain funds on demand even when depositors intend to use these funds for consumption in the future. This is explained by depositor overoptimism regarding their own ability to collect funds in a run. Capitalized institutions serving depositors with such beliefs emerge in equilibrium even if depositors and bank owners have the same preferences and the same investment opportunities. Various government regulations of these institutions, including minimum capital levels, requirements concerning the assets they may hold, deposit insurance and compulsory clawbacks in bankruptcy can raise the average ex post welfare of depositors.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16620.

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Date of creation: Dec 2010
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Handle: RePEc:nbr:nberwo:16620

Note: CF EFG ME
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  1. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2010. "Financial Innovation and Financial Fragility," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
  2. Frey, Bruno S. & Pommerehne, Werner W., 1993. "On the fairness of pricing -- An empirical survey among the general population," Journal of Economic Behavior & Organization, Elsevier, vol. 20(3), pages 295-307, April.
  3. Rotemberg, Julio J., 2008. "Minimally acceptable altruism and the ultimatum game," Journal of Economic Behavior & Organization, Elsevier, vol. 66(3-4), pages 457-476, June.
  4. Itzhak Ben-David & John R. Graham & Campbell R. Harvey, 2010. "Managerial Miscalibration," NBER Working Papers 16215, National Bureau of Economic Research, Inc.
  5. Muhamet Yildiz, 2003. "Bargaining without a Common Prior-An Immediate Agreement Theorem," Econometrica, Econometric Society, vol. 71(3), pages 793-811, 05.
  6. Francesco Squintani & Alvaro Sandroni, 2007. "Overconfidence, Insurance and Paternalism," Economics Discussion Papers 643, University of Essex, Department of Economics.
  7. Hasan, Iftekhar & Dwyer, Gerald P, Jr, 1994. "Bank Runs in the Free Banking Period," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 271-88, May.
  8. Augustin Landier & David Thesmar, 2009. "Financial Contracting with Optimistic Entrepreneurs," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 117-150, January.
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