The Dual Role of Demand Deposits under Asymmetric Information
When there is initial asymmetric information between lenders and borrowers, accepting checkable deposits can give banks information about the quality of future borrowers. Hence, the two main types of bank activities are complementarities. Nevertheless, i t is shown that intermediaries who fund themselves by other means and, thus, do not get the same borrower information as banks, can coexist with banks in equilibrium. With the possibility of legally binding contingent contracts, banks earn zero expected profits in equilibriu m in spite of their information advantage relative to other intermediaries. If legally binding contingent contracts are infeasib le, there may exist an implicit contract equilibrium. Copyright 1993 by The editors of the Scandinavian Journal of Economics.
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Volume (Year): 95 (1993)
Issue (Month): 1 ()
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