A Pure Bureaucratic-Entrepreneurial Theory of Deposit Insurance Adoption
Kam Hon Chu
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Kam Hon Chu: Memorial University of Newfoundland
Review of Economic Analysis, 2021, vol. 13, issue 3, 253-291
Abstract:
"Based on Becker, Kane, Niskanen, and Peltzman’s ideas, we develop a model to explain why deposit insurance is adopted even though policymakers are aware of its pitfalls in both theory and practice. In our model, the regulator acts as both a bureaucrat and an entrepreneur to maximize his self-interest through administering a deposit insurance scheme. The theory postulates that adoption of deposit insurance is more likely under the following conditions: the scheme is (i) publicly administered and (ii) privately funded, with (iii) non-risk rated insurance premium and (iv) compulsory membership; and there is (v) a larger deposit market with (vi) at least two groups of banks (good vs. bad), (vii) lower government ownership of banks, and (viii) higher economic freedom, such that one group exerts its political influence and gains from deposit insurance. Empirically our theory is supported by the stylized facts, cross-country binary-choice regression results and a case study of Canada."
Keywords: "Bureaucracy; Canada; Deposit Insurance; Economic Regulation; Political Economy; Private Interest Theory of Regulation; Public Interest Theory" (search for similar items in EconPapers)
JEL-codes: G28 K23 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:ren:journl:v:13:y:2021:i:3:p:253-291
DOI: 10.15353/rea.v13i3.3591
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