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A Behavioral Model of the Popularity and Regulation of Demandable Liabilities †

A Behavioral Model of the Popularity and Regulation of Demandable Liabilities † Abstract Overoptimism regarding one's ability to arrive early in a queue is shown to rationalize deposit contracts in which people can withdraw their funds on demand even if consumption takes place later. Capitalized institutions serving overoptimistic depositors emerge in equilibrium even if depositors and bank owners have identical preferences and investment opportunities. Consistent with the evidence, runs can lead people to move their deposits from one intermediary to another. Regulatory policies, including deposit insurance, minimum capital requirements and restrictions on the assets held by depository institutions can increase the ex ante welfare of depositors. (JEL G21, G28, G32, L51 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

A Behavioral Model of the Popularity and Regulation of Demandable Liabilities †

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Publisher
American Economic Association
Copyright
Copyright © 2015 by the American Economic Association
Subject
Articles
ISSN
1945-7715
eISSN
1945-7715
DOI
10.1257/mac.20130143
Publisher site
See Article on Publisher Site

Abstract

Abstract Overoptimism regarding one's ability to arrive early in a queue is shown to rationalize deposit contracts in which people can withdraw their funds on demand even if consumption takes place later. Capitalized institutions serving overoptimistic depositors emerge in equilibrium even if depositors and bank owners have identical preferences and investment opportunities. Consistent with the evidence, runs can lead people to move their deposits from one intermediary to another. Regulatory policies, including deposit insurance, minimum capital requirements and restrictions on the assets held by depository institutions can increase the ex ante welfare of depositors. (JEL G21, G28, G32, L51 )

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Jul 1, 2015

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