A Behavioral Model of the Popularity and Regulation of Demandable Liabilities

Julio Rotemberg

American Economic Journal: Macroeconomics, 2015, vol. 7, issue 3, 123-52

Abstract: Overoptimism regarding one's ability to arrive early in a queue is shown to rationalize deposit contracts in which people can withdraw their funds on demand even if consumption takes place later. Capitalized institutions serving overoptimistic depositors emerge in equilibrium even if depositors and bank owners have identical preferences and investment opportunities. Consistent with the evidence, runs can lead people to move their deposits from one intermediary to another. Regulatory policies, including deposit insurance, minimum capital requirements and restrictions on the assets held by depository institutions can increase the ex ante welfare of depositors. (JEL G21, G28, G32, L51)

JEL-codes: G21 G28 G32 L51 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/mac.20130143
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