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Government Deposit Insurance and the Diamond-Dybvig Model

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  • J. Huston McCulloch

    () (Department of Economics and Finance, The Ohio State University, Columbus, OH 43210.)

  • Min-Teh Yu

    () (Department of Finance, National Central University, Chung-Li 32054, Taiwan.)

Abstract

The apparent banking market failure modeled by Diamond and Dybvig [1983] rests on their inconsistently applying their “sequential servicing constraint” to private banks but not to their government deposit insurance agency. Without this inconsistency, banks can provide optimal risk-sharing without tax-based deposit insurance, even when the number of “type 1” agents is stochastic, by employing a “contingent bonus contract.” The threat of disintermediation noted by Jacklin [1987] in the nonstochastic case is still present but can be blocked by contractual trading restrictions. This article complements Wallace [1988], who considers an alternative resolution of this inconsistency. The Geneva Papers on Risk and Insurance Theory (1998) 23, 139–149. doi:10.1023/A:1008626211411

Suggested Citation

  • J. Huston McCulloch & Min-Teh Yu, 1998. "Government Deposit Insurance and the Diamond-Dybvig Model," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 23(2), pages 139-149, December.
  • Handle: RePEc:pal:genrir:v:23:y:1998:i:2:p:139-149
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    Cited by:

    1. Lazopoulos, Ioannis, 2013. "Liquidity uncertainty and intermediation," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 403-414.
    2. Thomas L. Hogan & William J. Luther, 2016. "The Implicit Costs of Government Deposit Insurance," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 31(Summer 20), pages 1-13.
    3. Ting-Fang Chiang & E-Ching Wu & Min-Teh Yu, 2007. "Premium setting and bank behavior in a voluntary deposit insurance scheme," Review of Quantitative Finance and Accounting, Springer, vol. 29(2), pages 205-222, August.

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