Suspension of Convertibility versus Deposit Insurance: A Welfare Comparison |
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Authors: | Margarita Samartín |
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Institution: | (1) Departamento de Economía de la Empresa, Universidad Carlos III de Madrid, Calle Madrid 126, 28903 Getafe, Spain |
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Abstract: | This paper introduces risk-averse preferences in Chariand Jagannathan (1988). A first motivation for thisextension is to give a positive role for a financial intermediaryin the economy, who offers risk-sharing contracts to liquidityseeking individuals. In this framework, both information-inducedan pure panic runs will occur. The second motivation is tocomplete Chari and Jagannathan's welfare analysis by comparingsuspension of convertibility and deposit insurance, given theirrelative benefits and costs (of randomization in meeting liquidityneeds or deadweight taxation). It is shown that the choice betweenthe two contracts depends on the level of risk aversion, theintertemporal discount factor and the attributes about theunderlying technology. |
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Keywords: | bank runs deposit contracts deposit insurance optimal risk sharing suspension of convertibility |
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