The Demise of Double Liability as an Optimal Contract for Large-Bank Stockholders
AbstractThis 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 InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5848.
Date of creation: Dec 1996
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- Edward J. Kane & Berry K. Wilson, 1998.
"A contracting-theory intepretation of the origins of Federal deposit insurance,"
Federal Reserve Bank of Cleveland, issue Aug, pages 573-595.
- 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, vol. 30(3), pages 573-95, August.
- Edward J. Kane & Berry K. Wilson, 1998. "A Contracting-Theory Interpretation of the Origins of Federal Deposit Insurance," NBER Working Papers 6451, National Bureau of Economic Research, Inc.
- Brock, Philip L., 1998. "Financial safety nets and incentive structures in Latin America," Policy Research Working Paper Series 1993, The World Bank.
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