Moral hazard in a voluntary deposit insurance system: Revisited

Camacho-Gutiérrez, Pablo and González-Cantú, Vanessa M. (2007): Moral hazard in a voluntary deposit insurance system: Revisited.

Abstract

This paper extends Wheelock and Kumbhakar’s (1995) test for moral hazard in the Kansas deposit insurance system (1910-1920). This paper tests and finds evidence of omitted bank-specific effects. Estimates in Wheelock and Kumbhakar (1995), as a result, are biased. This paper introduces unobserved individual heterogeneity to the test for moral hazard, corrects their estimates, and finds more evidence of moral hazard in the Kansas deposit insurance system.

• Item Type: MPRA Paper
• Language: English
• Keywords: Deposit insurance; moral hazard test; panel data; random and fixed effects
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C35 - Discrete Regression and Qualitative Choice Models ; Discrete Regressors ; Proportions; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

References

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Hsiao, C. (2003), Analysis of Panel Data, second ed., Cambridge: Cambridge University Press.

Wheelock, David C., and Subal C. Kumbhakar (1995), “Which Banks Choose Deposit Insurance? Evidence of Adverse Selection and Moral Hazard in a Voluntary Insurance System,” Journal of Money, Credit, and Banking, Vol. 27, No. 1, February, 186-201.

Wheelock, David C., and Wilson, Paul W (1995), “Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency.” The Review of Economics and Statistics, 689-700.