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Private and Social Welfare Gains in the Diamond‐Dybvig Model: A Rationale for the Existence of Banks

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  • Marco Guerrazzi

Abstract

In this paper, I evaluate the private and the social welfare gains that in the Diamond‐Dybvig model of bank runs characterise the switch from a decentralised to a centralised equilibrium that may hold even in an atomistic environment with banking intermediation. Relying on logarithmic preferences, I show that such a social welfare gain is an increasing function of the discount rate of more patient agents. Moreover, I demonstrate that for each level of the discount rate of agents who are willing to postpone consumption, there is an optimal value of the proportion of these agents in the economy that maximises the social welfare gain.

Suggested Citation

  • Marco Guerrazzi, 2026. "Private and Social Welfare Gains in the Diamond‐Dybvig Model: A Rationale for the Existence of Banks," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 55(1), February.
    • Handle: RePEc:bla:ecnote:v:55:y:2026:i:1:n:e70019
    DOI: 10.1111/ecno.70019
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    1. Lloyd-Smith, Patrick & Adamowicz, Wiktor & Entem, Alicia & Fenichel, Eli P. & Rouhi Rad, Mani, 2021. "The decade after tomorrow: Estimation of discount rates from realistic temporal decisions over long time horizons," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 158-174.
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    6. Mark Gertler & Nobuhiro Kiyotaki, 2015. "Banking, Liquidity, and Bank Runs in an Infinite Horizon Economy," American Economic Review, American Economic Association, vol. 105(7), pages 2011-2043, July.
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    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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