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Achieving safety: Personal, private, and public provision

Author

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  • Perotti, Enrico
  • Terovitis, Spyros

Abstract

We study how a primary need for minimum safety affects investment choices. In addition to risky projects, agents may choose to invest in personal assets they can control. Investing in personal assets serves as self-insurance, as they ensure a higher minimum return but offer a lower expected return than the risky project offers. In autarky, investors ensure a minimum return by personal assets, besides investing in the risky project. Private intermediaries and a safe rate arise endogenously to limit inefficient self-insurance, with self-insured investors holding bank equity to safeguard private safe debt. The endogenous conflict over interim risk choices is resolved by demandable debt, forcing early liquidation in states in which the ability of banks to repay debt holders remains uncertain. Our work highlights the unintended consequences of public provision of safety for private provision of safety and aggregate investment, demonstrating that these effects depend critically on whether public provision takes the form of public debt or deposit insurance.

Suggested Citation

  • Perotti, Enrico & Terovitis, Spyros, 2025. "Achieving safety: Personal, private, and public provision," Journal of Economic Theory, Elsevier, vol. 224(C).
    • Handle: RePEc:eee:jetheo:v:224:y:2025:i:c:s0022053125000080
    DOI: 10.1016/j.jet.2025.105962
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    Cited by:

    1. Castells-Jauregui, Madalen, 2025. "Private safe-asset supply and financial instability," Working Paper Series 3044, European Central Bank.

    More about this item

    Keywords

    Safe assets; Demandable debt; Intermediation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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