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Piggy Banks: Financial Intermediaries as a Commitment to Save

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  • Donald Morgan
  • Kathrine Samolyk

Abstract

Banks and other intermediaries may help savers commit to investment plans that savers could not stick to if they held assets directly. We illustrate this commitment function using a version of the Diamond and Dybvig ( 1983 ) model where savers’ short-run liquidity needs are correlated with shocks to investment opportunities. The investment securities are all freely tradeable, yet savers still do better if they delegate their investment decisions to an intermediary that overrides the savers’ liquidity demands when investment opportunities warrant. Bank CDs, insurance annuities, pensions, and even social security, by locking funds out of reach, may all constitute real world examples of this commitment role of financial intermediaries. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Donald Morgan & Kathrine Samolyk, 2014. "Piggy Banks: Financial Intermediaries as a Commitment to Save," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(3), pages 271-286, June.
    • Handle: RePEc:kap:jfsres:v:45:y:2014:i:3:p:271-286
    DOI: 10.1007/s10693-013-0166-2
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    References listed on IDEAS

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    1. Hellwig, Martin, 1994. "Liquidity provision, banking, and the allocation of interest rate risk," European Economic Review, Elsevier, vol. 38(7), pages 1363-1389, August.
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    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    4. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
    5. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
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    Cited by:

    1. James J. McAndrews & William Roberds, 1999. "Payment intermediation and the origins of banking," FRB Atlanta Working Paper 99-11, Federal Reserve Bank of Atlanta.

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    More about this item

    Keywords

    Financial intermediaries; Banks; Commitment mechanisms; Saving; G21; G23; E21;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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