Banking, incentive constraints, and deposit contracts with nonlinear return
This paper presents two results regarding banking theory: (1) demand deposit contracts are essential in providing insurance against preferences shocks, as in Diamond and Dybvig (1983), if and only if the incentive compatibility conditions bind at the social optimum; and (2) for additively separable preferences with random discount factors, demand deposit contracts have the realistic feature that the interest rate paid is an increasing function of deposit balance.
Copyright © 1996 Springer-Verlag.
Lin, P. (1996). Banking, incentive constraints, and deposit contracts with nonlinear return. Economic Theory, 8(1), 27-39. doi: 10.1007/BF01212010