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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)


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.

Suggested Citation

  • Ping Lin, 1996. "Banking, incentive constraints, and demand deposit contracts with nonlinear returns (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(1), pages 27-39.
  • Handle: RePEc:spr:joecth:v:8:y:1996:i:1:p:27-39 Note: Received: February 13, 1995; revised version April 19, 1995

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    References listed on IDEAS

    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    2. Chateauneuf, Alain & Cohen, Michele & Meilijson, Isaac, 2004. "Four notions of mean-preserving increase in risk, risk attitudes and applications to the rank-dependent expected utility model," Journal of Mathematical Economics, Elsevier, vol. 40(5), pages 547-571, August.
    3. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    4. Chateauneuf, Alain & Cohen, Michele, 1994. "Risk Seeking with Diminishing Marginal Utility in a Non-expected Utility Model," Journal of Risk and Uncertainty, Springer, vol. 9(1), pages 77-91, July.
    5. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    6. Quiggin John & Wakker Peter, 1994. "The Axiomatic Basis of Anticipated Utility: A Clarification," Journal of Economic Theory, Elsevier, vol. 64(2), pages 486-499, December.
    7. Allais Maurice, 1990. "Cardinal Utility," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 1(2), pages 1-38, June.
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    Cited by:

    1. Youichiro Higashi & Kazuya Hyogo & Norio Takeoka & Hiroyuki Tanaka, 2017. "Comparative impatience under random discounting," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(3), pages 621-651, March.
    2. Jarrow, Robert & Xu, Liheng, 2015. "Bank runs and self-insured bank deposits," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 180-189.
    3. Lin, Ping, 2003. "Equivalence between the Diamond-Dybvig banking model and the optimal income taxation model," Economics Letters, Elsevier, vol. 79(2), pages 193-198, May.
    4. Azrieli, Yaron & Peck, James, 2012. "A bank runs model with a continuum of types," Journal of Economic Theory, Elsevier, vol. 147(5), pages 2040-2055.

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