Diamond and Dybvig's classic theory of financial intermediation : what's missing?
Federal Reserve Bank of Minneapolis Quarterly Review
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.
Copyright © 2000 Federal Reserve Bank of Minneapolis.
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Green, E. J., & Lin, P. (2000). Diamond and Dybvig's classic theory of financial intermediation: What's missing? Federal Reserve Bank of Minneapolis Quarterly Review, 24(1), 3-13.