Bank incentives, contract design and bank runs |
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Authors: | David Andolfatto Ed Nosal |
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Affiliation: | a Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, B.C., Canada V5A 1S6 b Rimini Centre for Economic Analysis, Rimini, Italy c Financial Markets Group, Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, IL 60604-1413, USA |
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Abstract: | We study the Diamond-Dybvig [Bank runs, deposit insurance, and liquidity, J. Polit. Econ. 91 (1983) 401-419] model as developed in Green and Lin [Implementing efficient allocations in a model of financial intermediation, J. Econ. Theory 109 (2003) 1-23] and Peck and Shell [Equilibrium bank runs, J. Polit. Econ. 111 (2003) 103-123]. We dispense with the notion of a bank as a coalition of depositors. Instead, our bank is a self-interested agent with a technological advantage in record-keeping. We examine the implications of the resulting agency problem for the design of bank contracts and the possibility of bank-run equilibria. For a special case, we discover that the agency problem may or may not simplify the qualitative structure of bank liabilities. We also find that the uniqueness result in Green and Lin [Implementing efficient allocations in a model of financial intermediation, J. Econ. Theory 109 (2003) 1-23] is robust to our form of agency, but that the non-uniqueness result in Peck and Shell [Equilibrium bank runs, J. Polit. Econ. 111 (2003) 103-123] is not. |
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Keywords: | D82 G21 |
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