Abstract
This paper presents two results regarding banking theory: (1) demand deposit contracts are essential in providing insurance against preferences shocks, as in Diamond and Dybvig (1983), if and only if the incentive compatibility conditions bind at the social optimum; and (2) for additively separable preferences with random discount factors, demand deposit contracts have the realistic feature that the interest rate paid is an increasing function of deposit balance.
Original language | English |
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Pages (from-to) | 27-39 |
Number of pages | 13 |
Journal | Economic Theory |
Volume | 8 |
Issue number | 1 |
DOIs | |
Publication status | Published - 1 Jan 1996 |
Externally published | Yes |