Moral Hazard in the Diamond-Dybvig Model of Banking
AbstractWe modify the Diamond-Dybvig  model studied in Green and Lin  to incorporate a self-interested banker who has a private record-keeping technology. A public record-keeping device does not exist. We find that there is a trade-off between sophisticated contracts that possess relatively good risk-sharing properties but allocate resources inefficiently for incentive reasons, and simple contracts that possess relatively poor risk-sharing properties but economize on the inefficient use of resources. While this trade-off depends on model parameters, we find that simple contracts prevail under a wide range of empirically plausible parameter values. Although moral hazard in banking may simplify the optimal structure of deposit liabilities, this simple structure does not enhance the prospect of bank runs
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 221.
Date of creation: 2007
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Other versions of this item:
- David Andolfatto & Ed Nosal, 2006. "Moral hazard in the Diamond-Dybvig model of banking," Working Paper 0623, Federal Reserve Bank of Cleveland.
- Andolfatto, David & Nosal, Ed, 2006. "Moral Hazard in the Diamond-Dybvig Model of Banking," MPRA Paper 1337, University Library of Munich, Germany.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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