Banking, incentive constraints, and demand deposit contracts with nonlinear returns (*)
This paper presents two results regarding banking theory: (1) demand deposit contracts are essential in providing insurance against preferences shocks, as in Diamond and Dybvig (1983), if and only if the incentive compatibility conditions bind at the social optimum; and (2) for additively separable preferences with random discount factors, demand deposit contracts have the realistic feature that the interest rate paid is an increasing function of deposit balance.
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Volume (Year): 8 (1996)
Issue (Month): 1 ()
|Note:||Received: February 13, 1995; revised version April 19, 1995|
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