Banking: a mechanism design approach

Fabrizio Mattesini, Cyril Monnet and Randall Wright

No 09-26, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The authors study banking using the tools of mechanism design, without a priori assumptions about what banks are, who they are, or what they do. Given preferences, technologies, and certain frictions - including limited commitment and imperfect monitoring - they describe the set of incentive feasible allocations and interpret the outcomes in terms of institutions that resemble banks. The bankers in the authors' model endogenously accept deposits, and their liabilities help others in making payments. This activity is essential: if it were ruled out the set of feasible allocations would be inferior. The authors discuss how many and which agents play the role of bankers. For example, they show agents who are more connected to the market are better suited for this role since they have more to lose by reneging on obligations. The authors discuss some banking history and compare it with the predictions of their theory.

Keywords: Banks; and; banking (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ban, nep-cta and nep-mic
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Citations: View citations in EconPapers (10)

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Working Paper: Banking: a mechanism design approach (2009)
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