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A Pure Bureaucratic-Entrepreneurial Theory of Deposit Insurance Adoption

Author

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  • Kam Hon Chu

    (Memorial University of Newfoundland)

Abstract

"Based on Becker, Kane, Niskanen, and Peltzman’s ideas, we develop a model to explain why deposit insurance is adopted even though policymakers are aware of its pitfalls in both theory and practice. In our model, the regulator acts as both a bureaucrat and an entrepreneur to maximize his self-interest through administering a deposit insurance scheme. The theory postulates that adoption of deposit insurance is more likely under the following conditions: the scheme is (i) publicly administered and (ii) privately funded, with (iii) non-risk rated insurance premium and (iv) compulsory membership; and there is (v) a larger deposit market with (vi) at least two groups of banks (good vs. bad), (vii) lower government ownership of banks, and (viii) higher economic freedom, such that one group exerts its political influence and gains from deposit insurance. Empirically our theory is supported by the stylized facts, cross-country binary-choice regression results and a case study of Canada."

Suggested Citation

  • Kam Hon Chu, 2021. "A Pure Bureaucratic-Entrepreneurial Theory of Deposit Insurance Adoption," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 13(3), pages 253-291, October.
    • Handle: RePEc:ren:journl:v:13:y:2021:i:3:p:253-291
    DOI: https://doi.org/10.15353/rea.v13i3.3591
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    More about this item

    Keywords

    Bureaucracy; Canada; Deposit Insurance; Economic Regulation; Political Economy; Private Interest Theory of Regulation; Public Interest Theory;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law

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