Which Banks Choose Deposit Insurance? Evidence of Adverse Selection and Moral Hazard in a Voluntary Insurance System

David Wheelock and Subal Kumbhakar

Journal of Money, Credit and Banking, 1995, vol. 27, issue 1, 186-201

Abstract: This article investigates adverse selection and moral hazard in the voluntary deposit insurance system of Kansas, which operated from 1909 to 1929. Regulations were imposed to limit risk-taking and membership was made voluntary to assuage objections that insurance forces conservative banks to protect depositors of high-risk institutions. The authors find, however, that risk-prone banks were the most likely to join the system at its inception. Using a simultaneous equations model, they also detect both adverse selection and moral hazard behavior throughout the system's first ten years. Copyright 1995 by Ohio State University Press.

Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:27:y:1995:i:1:p:186-201

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