Banks, depositors and liquidity shocks: long term vs. short term interest rates in a model of adverse selection
AbstractThis model takes into consideration the fact that depositors have private information about their probability of having to withdraw early. The banks can offer a menu of contracts with different combinations of long and short term interest rates to those who withdraw early and wait respectively. This is a principal- agent model of a bank in a competitive market and depositors where depositors are either low or high type which indicates the probability of early withdrawal. Therefore they will consider the long-term and short-term returns in their investment decision. We find the contracts that the banks offer that can be sustained as equilibrium - symmetric pooling equilibrium where only one contract is offered and a separating equilibrium where two contracts are offered. It is found that found return of more than one can never be sustained. Further, there is no symmetric pooling equilibrium when both types withdraw with some probability. However a symmetric pooling equilibrium can be sustained if the proportion of low type agents is high enough and they never withdraw early. There is a separating equilibrium if the proportion of low type agents is sufficiently high.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0703.
Date of creation: May 2007
Date of revision:
Contact details of provider:
Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
Phone: 01334 462420
Fax: 01334 462438
Web page: http://crieff.wordpress.com/
More information through EDIRC
adverse selection; interest rates; liquidity shock; private information.;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bram Boskamp).
If references are entirely missing, you can add them using this form.