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On the Welfare Equivalence of Asset Markets and Banking in Diamond Dybvig Economies

Alexander Zimper

No 201356, Working Papers from University of Pretoria, Department of Economics

Abstract: Why do people choose bank deposit contracts over a direct participation in asset markets? In their seminal paper, Diamond and Dybvig (1983) answer this question by claiming that bank deposit contracts can implement allocations that are welfare superior to asset markets equilibria. The present paper demonstrates that this claim is false whenever the asset market participants are highly rational.

Keywords: Demand deposit contract; Asset market; Asymmetric information (search for similar items in EconPapers)
JEL-codes: G14 G21 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2013-09
New Economics Papers: this item is included in nep-ban and nep-cta
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