Optimal banking contracts and financial fragility

Huberto Ennis and Todd Keister

Economic Theory, 2016, vol. 61, issue 2, 335-363

Abstract: We study a finite-depositor version of the Diamond–Dybvig model of financial intermediation in which the bank and all depositors observe withdrawals as they occur. We derive the constrained efficient allocation of resources in closed form and show that this allocation provides liquidity insurance to depositors. The contractual arrangement that decentralizes this allocation resembles a standard bank deposit with a demandable debt-like structure. When withdrawals are unusually high, however, depositors who withdraw relatively late experience significant losses. This contractual arrangement can be fragile, admitting another equilibrium in which depositors run on the bank by withdrawing funds regardless of their liquidity needs. Copyright Springer-Verlag Berlin Heidelberg 2016

Keywords: Bank runs; Demand deposits; Sequential service; Liquidity insurance; G21; G01; D82 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://hdl.handle.net/10.1007/s00199-015-0899-2 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Optimal Banking Contracts and Financial Fragility (2015)
Working Paper: Optimal banking contracts and financial fragility (2012)
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:spr:joecth:v:61:y:2016:i:2:p:335-363

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-015-0899-2

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().