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A Behavioral Model of Demandable Deposits and its Implications for Financial Regulation

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  • Julio J. Rotemberg

Abstract

A model is developed which rationalizes contracts that give depositors the right to obtain funds on demand even when depositors intend to use these funds for consumption in the future. This is explained by depositor overoptimism regarding their own ability to collect funds in a run. Capitalized institutions serving depositors with such beliefs emerge in equilibrium even if depositors and bank owners have the same preferences and the same investment opportunities. Various government regulations of these institutions, including minimum capital levels, requirements concerning the assets they may hold, deposit insurance and compulsory clawbacks in bankruptcy can raise the average ex post welfare of depositors.

Suggested Citation

  • Julio J. Rotemberg, 2010. "A Behavioral Model of Demandable Deposits and its Implications for Financial Regulation," NBER Working Papers 16620, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16620
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    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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