Diamond and Dybvig's classic theory of financial intermediation : what's missing?

Edward J. GREEN, Ping LIN

Research output: Journal PublicationsJournal Article (refereed)

Abstract

The article shows that in a finite-trader version of the Diamond and Dybvig model (1983), the ex ante efficient allocation can be implemented as a unique equilibrium. This is so even in the presence of the sequential service constraint, as emphasized by Wallace (1988), whereby the bank must solve a sequence of maximization problems as depositors contact it at different times. A three-trader example with constant relative risk-aversion utility is used in order to illustrate clearly the requirements that the sequential service constraint imposes on implementation.
Original languageEnglish
Pages (from-to)3-13
Number of pages11
JournalFederal Reserve Bank of Minneapolis Quarterly Review
Volume24
Issue number1
Publication statusPublished - 1 Jan 2000

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