TY - JOUR
T1 - Bank runs
T2 - Liquidity costs and investment distortions
AU - Cooper, Russell
AU - Ross, Thomas W.
N1 - Funding Information:
We have benefitedfr omd iscussiono n this topic with Paul BeaudryF, anny DemersJ,o n Eaton,A lok Johri, Arthur Rolnick,T homasR ymesF, abioSchian-tarelli,D avidWeil and StevenW illiamsonS. uggestionfsr om RobertK ing and an anonymourse fereew erem ucha ppreciateads weret hec ommentosf seminar participantast Boston UniversityB, rown UniversityC, arletonU niversityt,h e FederaRl eserveB ank of Minneapolist,h e Universityo f British Columbiaa nd the Universityo f Maryland. Financial support from the National Science
PY - 1998/2
Y1 - 1998/2
N2 - In this paper we extend the Diamond and Dybvig (1983) model of intermediation to study further the conditions under which bank runs can occur and to consider how private parties might adjust to the existence of bank-run equilibria. We provide weaker necessary conditions for runs. We then characterize how banks respond to the possibility of runs in their design of deposit contracts and investment decisions. Banks might choose to offer contracts that prevent runs, but under some conditions the (second) best contracts will involve accepting some risk of runs in order to achieve higher expected returns from their investments.
AB - In this paper we extend the Diamond and Dybvig (1983) model of intermediation to study further the conditions under which bank runs can occur and to consider how private parties might adjust to the existence of bank-run equilibria. We provide weaker necessary conditions for runs. We then characterize how banks respond to the possibility of runs in their design of deposit contracts and investment decisions. Banks might choose to offer contracts that prevent runs, but under some conditions the (second) best contracts will involve accepting some risk of runs in order to achieve higher expected returns from their investments.
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U2 - 10.1016/S0304-3932(97)00070-6
DO - 10.1016/S0304-3932(97)00070-6
M3 - Article
AN - SCOPUS:0031994543
VL - 41
SP - 27
EP - 38
JO - Carnegie-Rochester Confer. Series on Public Policy
JF - Carnegie-Rochester Confer. Series on Public Policy
SN - 0304-3932
IS - 1
ER -