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Banking, incentive constraints, and demand deposit contracts with nonlinear returns (*)

  • Ping Lin

    (Department of Economics, Southern Methodist University, Dallas, Texas 75275-0496, USA)

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    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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    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 8 (1996)
    Issue (Month): 1 ()
    Pages: 27-39

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    Handle: RePEc:spr:joecth:v:8:y:1996:i:1:p:27-39
    Note: Received: February 13, 1995; revised version April 19, 1995
    Contact details of provider: Web page: http://link.springer.de/link/service/journals/00199/index.htm

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