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On the Welfare Equivalence of Asset Markets and Banking in Diamond Dybvig Economies


  • Alexander Zimper

    () (Department of Economics, University of Pretoria)


Why do people choose bank deposit contracts over a direct participation in asset markets? In their seminal paper, Diamond and Dybvig (1983) answer this question by claiming that bank deposit contracts can implement allocations that are welfare superior to asset markets equilibria. The present paper demonstrates that this claim is false whenever the asset market participants are highly rational.

Suggested Citation

  • Alexander Zimper, 2013. "On the Welfare Equivalence of Asset Markets and Banking in Diamond Dybvig Economies," Working Papers 201356, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201356

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    References listed on IDEAS

    1. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, vol. 35(1), pages 19-25, February.
    2. Hellwig, Martin, 1994. "Liquidity provision, banking, and the allocation of interest rate risk," European Economic Review, Elsevier, vol. 38(7), pages 1363-1389, August.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    4. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    5. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, January.
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    Cited by:

    1. Zimper, Alexander, 2016. "Banks versus markets. A response to Kucinskas," Economics Letters, Elsevier, vol. 147(C), pages 174-176.
    2. Kuńćinskas, Simas, 2016. "When are banks better than markets? Comment on Zimper (2013)," Economics Letters, Elsevier, vol. 147(C), pages 171-173.

    More about this item


    Demand deposit contract; Asset market; Asymmetric information;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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