Equivalence between the Diamond-Dybvig banking model and the optimal income taxation model
Bank run, Demand deposit contract, Optimal income taxation
It is shown that the Diamond-Dybvig [Journal of Political Economy 96 (1983) 768] banking model with a continuum of types of agents has the same analytical structure as the standard optimal income taxation model [Review of Economic Studies 38 (1971) 175; Review of Economic Studies 43 (1976) 261]. Insights from the income taxation literature immediately imply that a bank-run equilibrium exists in the banking model as long as the long-term project is sufficiently costly to liquidate.
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Lin, P. (2003). Equivalence between the Diamond-Dybvig banking model and the optimal income taxation model. Economics Letters, 79(2), 193-198. doi: 10.1016/S0165-1765(02)00304-X