EconPapers    
Economics at your fingertips  
 

Moral hazard in the Diamond-Dybvig model of banking

David Andolfatto () and Ed Nosal

No 623, Working Paper from Federal Reserve Bank of Cleveland

Abstract: We modify the Diamond-Dybvig model studied in Green and Lin to incorporate a self-interested banker who has a private record-keeping technology. A public record-keeping device does not exist. We find that there is a trade-off between sophisticated contracts that possess relatively good risk-sharing properties but allocate resources inefficiently for incentive reasons, and simple contracts that possess relatively poor risk-sharing properties but economize on the inefficient use of resources. While this trade-off depends on model parameters, we find that simple contracts prevail under a wide range of empirically plausible parameter values. Although moral hazard in banking may simplify the optimal structure of deposit liabilities, this simple structure does not enhance the prospect of bank runs.

Keywords: Contracts; Financial crises; Banks and banking (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.clevelandfed.org/research/Workpaper/2006/wp0623.pdf (application/pdf)

Related works:
Working Paper: Moral Hazard in the Diamond-Dybvig Model of Banking (2007) Downloads
Working Paper: Moral Hazard in the Diamond-Dybvig Model of Banking (2006) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:fip:fedcwp:0623

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Paper from Federal Reserve Bank of Cleveland
Contact information at EDIRC.
Series data maintained by Lee Faulhaber ().

 
Page updated 2014-10-15
Handle: RePEc:fip:fedcwp:0623