Banking, incentive constraints, and deposit contracts with nonlinear return

Research output: Journal PublicationsJournal Article (refereed)

10 Citations (Scopus)

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 languageEnglish
Pages (from-to)27-39
Number of pages13
JournalEconomic Theory
Volume8
Issue number1
DOIs
Publication statusPublished - 1 Jan 1996
Externally publishedYes

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