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Is Fairly Priced Deposit Insurance Possible?

Author

Listed:
  • Yuk-Shee Chan

    (University of Southern California)

  • Stuart I. Greenbaum

    (Olin School of Business, Washington University)

  • Anjan V. Thakor

    (Olin School of Business, Washington University)

Abstract

We analyze risk-sensitive, incentive-compatible deposit insurance in the presence of private information and moral hazard. Without deposit-linked subsidies it is impossible to implement risk-sensitive, incentive- compatible deposit insurance pricing in a competitive, deregulared environment, except when the deposit insurer is the least risk averase agent in the economy. We establish this formally in the context of an insurance scheme in which privately informed depository institutions are offered deposit insurance premia contingent on reported capital; the result holds for alternative sorting instruments as well. This suggests a contradiction between deregulation and fairly priced, risk-sensitive deposit insurance.

Suggested Citation

  • Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Is Fairly Priced Deposit Insurance Possible?," Finance 0411018, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0411018
    Note: Type of Document - pdf; pages: 20
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    References listed on IDEAS

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