Implementing efficient allocations in a model of financial intermediation
Journal of Economic Theory
Bank run, Financial intermediation, Implementation
In a finite-trader version of the Diamond and Dybvig (J. Polit. Econ. 91 (1983) 401) model, the ex ante efficient allocation is implementable by a direct mechanism (i.e., each trader announces the type of his own ex post preference) in which truthful revelation is the strictly dominant strategy for each trader. When the model is modified by formalizing the sequential-service constraint (cf. Wallace (Fed. Reserve Bank Minneapolis Quart. Rev. 12 (1988) 3)), the truth-telling equilibrium implements the symmetric, ex ante efficient allocation with respect to iterated elimination of strictly dominated strategies.
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Green, E. J., & Lin, P. (2003). Implementing efficient allocations in a model of financial intermediation. Journal of Economic Theory, 109(1), 1-23. doi: 10.1016/S0022-0531(02)00017-0