Demand deposit contracts and bank runs with present biased preferences

Minwook Kang

Journal of Banking & Finance, 2020, vol. 119, issue C

Abstract: This paper extends the Diamond–Dybvig model of bank runs by incorporating hyperbolic discounting. The main question is how consumers’ myopic decisions affect the possibility of a bank run and the bank’s optimal contract. Under hyperbolic discounting, consumers’ deposit preferences differ from their withdrawal preferences. Therefore, the bank needs to consider two separate preferences when designing the optimal banking contract, making it more difficult to design a run-safe banking contract. This difference in preferences could increase the possibility of a bank run in equilibrium. Although the bank can design a run-proof contract, the ex-ante welfare through banking services will be lower under hyperbolic discounting due to its tighter incentive compatibility constraint.

Keywords: Bank runs; Demand deposits; Hyperbolic discounting; Financial fragility; Present bias (search for similar items in EconPapers)
JEL-codes: D53 E44 G21 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426620301679
Full text for ScienceDirect subscribers only

Related works:
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: https://EconPapers.repec.org/RePEc:eee:jbfina:v:119:y:2020:i:c:s0378426620301679

DOI: 10.1016/j.jbankfin.2020.105901

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().