Private and social welfare gains in the Diamond-Dybvig model: A rationale for the existence of banks

Guerrazzi, Marco (2024): Private and social welfare gains in the Diamond-Dybvig model: A rationale for the existence of banks.

Abstract

In this note, I evaluate the private and the social welfare gains that in the Diamond-Dybvig model of bank runs characterize the switch from a decentralized to a centralized equilibrium that may hold even in an atomistic environment with banking intermediation. Specifically, relying on logarithmic preferences, I show that such a social welfare gain is an increasing function of the discount rate of more patient agents. Moreover, I show that for each level of the discount rate of patient agents, there is an optimal value of the proportion of these agents in the economy that maximizes the social welfare gain.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bank runs; Private and social welfare gains; Banking intermediation; Bernoulli distribution
• Subjects: D - Microeconomics > D0 - General > D02 - Institutions: Design, Formation, Operations, and Impact; E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

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