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 | |
| Publication status | Published - 1 Jan 1996 |
| Externally published | Yes |