The Term-Structure of Investment and the Banks' Insurance Function
The article re-examines the proposition, first formulated by Bryant (1980) and Diamond and Dybcvig ( 1983), that in a production economy with stochastic liquidity shocks to the household sector, banks serve to provide optimal intertemporal insurance to consumers. The paper argues that in order to understand the moral hazard problems inherent in this insurance problem, it is too narrow to consider solely the role of banks as providers of liquidity. The paper develops a model with several investment opportunities in which banks have the additional function of asset diversification.
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|Date of creation:||Feb 1996|
|Date of revision:|
|Publication status:||Published in European Economic Review, vol. 41 (7), July 1997, pp. 1355-1374|
|Contact details of provider:|| Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne|
Phone: ++41 21 692.33.20
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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