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The Demise of Double Liability as an Optimal Contract for Large-Bank Stockholders


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  • Berry K. Wilson
  • Edward J. Kane


This paper tests the optimal-contracting hypothesis, drawing upon data from a natural experiment that ended during the Great Depression. The subjects of our experiment are bank stockholders. The experimental manipulation concerns the imposition of state or federal restrictions on the contracts they write with bank creditors. We contrast stockholders that were subject to the now-conventional privilege of limited liability with stockholders that faced an additional liability in liquidation tied to the par value of the bank's capital. Our tests show that optimal contracting theory can provide an explanation both for the long survival of extended-liability rules in banking and for why they were abandoned in the 1930s.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5848.

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Date of creation: Dec 1996
Date of revision:
Publication status: published as Edward K. Kane & Berry K. Wilson, 1997. "The demise of double liability as an optimal contract for large-bank stockholders," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 374-401.
Handle: RePEc:nbr:nberwo:5848

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Cited by:
  1. Mitchener, Kris James & Richardson, Gary, 2013. "Does “Skin in the Game” Reduce Risk Taking? Leverage, Liability and the Long-Run Consequences of New Deal Financial Reforms," CAGE Online Working Paper Series, Competitive Advantage in the Global Economy (CAGE) 118, Competitive Advantage in the Global Economy (CAGE).
  2. Brock, Philip L., 1998. "Financial safety nets and incentive structures in Latin America," Policy Research Working Paper Series 1993, The World Bank.
  3. von Furstenberg, George M., 2011. "Contingent capital to strengthen the private safety net for financial institutions: Cocos to the rescue?," Discussion Paper Series 2: Banking and Financial Studies 2011,01, Deutsche Bundesbank, Research Centre.
  4. Kris James Mitchener & Gary Richardson, 2013. "Does “Skin in the Game” Reduce Risk Taking? Leverage, Liability and the Long-Run Consequences of New Deal Banking Reforms," NBER Working Papers 18895, National Bureau of Economic Research, Inc.
  5. Kane, Edward J & Wilson, Berry K, 1998. "A Contracting-Theory Interpretation of the Origins of Federal Deposit Insurance," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(3), pages 573-95, August.
  6. Esty, Benjamin C., 1998. "The impact of contingent liability on commercial bank risk taking," Journal of Financial Economics, Elsevier, Elsevier, vol. 47(2), pages 189-218, February.


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