Banking, incentive constraints, and deposit contracts with nonlinear return

Ping LIN

doi:10.1007/BF01212010

Banking, incentive constraints, and deposit contracts with nonlinear return

Ping LIN

Research output: Journal Publications › Journal 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 language	English
Pages (from-to)	27-39
Number of pages	13
Journal	Economic Theory
Volume	8
Issue number	1
DOIs	https://doi.org/10.1007/BF01212010
Publication status	Published - 1 Jan 1996
Externally published	Yes

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AB - 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.

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