IDEAS home Printed from https://ideas.repec.org/p/sol/wpaper/2013-260066.html
   My bibliography  Save this paper

Behavioral Banking: A Theory of the Banking Firm with Time-Inconsistent Depositors

Author

Listed:
  • Carolina Laureti
  • Ariane Szafarz

Abstract

Time-consistent savers require compensation for holding savings accounts that are illiquid rather than liquid. In equilibrium, banks subject to reserve requirements for liquidity management are keen to offer that compensation. Yet the presence of time-inconsistent agents, who value illiquidity as a commitment device to discipline their future selves, reshuffles the deck. Our model determines the equilibrium liquidity premium––the interest spread between illiquid and liquid deposits––offered by a bank to a pool comprising known proportions of time-consistent and time-inconsistent savers, under the assumption that individual time consistency or inconsistency is private information. We characterize pooling and separating equilibria, and uncover two asymmetric externalities: time-inconsistent agents obtain a higher premium than they would request ex ante for holding illiquid accounts, while time-inconsistent agents make it harder for their time-consistent counterparts to get illiquid accounts. We also deliver insights on reserve requirements for banking regulation.

Suggested Citation

  • Carolina Laureti & Ariane Szafarz, 2017. "Behavioral Banking: A Theory of the Banking Firm with Time-Inconsistent Depositors," Working Papers CEB 17-028, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:sol:wpaper:2013/260066
    as

    Download full text from publisher

    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/260066/3/wp17028.pdf
    File Function: Œuvre complète ou partie de l'œuvre
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Heather Royer & Mark Stehr & Justin Sydnor, 2015. "Incentives, Commitments, and Habit Formation in Exercise: Evidence from a Field Experiment with Workers at a Fortune-500 Company," American Economic Journal: Applied Economics, American Economic Association, vol. 7(3), pages 51-84, July.
    2. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages 164-187, February.
    3. Jisoo Hwang & Johanna Möllerström, 2017. "Design of reforms with time-inconsistent voters," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(3), pages 748-761, June.
    4. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128, Elsevier.
    5. Miller, Stephen M., 1975. "A theory of the banking firm : Comment," Journal of Monetary Economics, Elsevier, vol. 1(1), pages 123-128, January.
    6. Attila Ambrus & Georgy Egorov, 2013. "Comment on “Commitment vs. Flexibility”," Econometrica, Econometric Society, vol. 81(5), pages 2113-2124, September.
    7. Nava Ashraf & Dean Karlan & Wesley Yin, 2006. "Tying Odysseus to the Mast: Evidence From a Commitment Savings Product in the Philippines," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(2), pages 635-672.
    8. Xavier Giné & Dean Karlan & Jonathan Zinman, 2010. "Put Your Money Where Your Butt Is: A Commitment Contract for Smoking Cessation," American Economic Journal: Applied Economics, American Economic Association, vol. 2(4), pages 213-235, October.
    9. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, April.
    10. repec:bla:jfinan:v:43:y:1988:i:3:p:749-61 is not listed on IDEAS
    11. Esteban, Susanna & Miyagawa, Eiichi & Shum, Matthew, 2007. "Nonlinear pricing with self-control preferences," Journal of Economic Theory, Elsevier, vol. 135(1), pages 306-338, July.
    12. George-Marios Angeletos & David Laibson & Andrea Repetto & Jeremy Tobacman & Stephen Weinberg, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer.
    13. Oster Sharon M. & Scott Morton Fiona M., 2005. "Behavioral Biases Meet the Market: The Case of Magazine Subscription Prices," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-32, March.
    14. Pascaline Dupas & Jonathan Robinson, 2013. "Why Don't the Poor Save More? Evidence from Health Savings Experiments," American Economic Review, American Economic Association, vol. 103(4), pages 1138-1171, June.
    15. Dermine, J., 1986. "Deposit rates, credit rates and bank capital : The Klein-Monti Model Revisited," Journal of Banking & Finance, Elsevier, vol. 10(1), pages 99-114, March.
    16. Marc Labie & Carolina Laureti & Ariane Szafarz, 2017. "Discipline and flexibility: a behavioural perspective on microfinance product design," Oxford Development Studies, Taylor & Francis Journals, vol. 45(3), pages 321-337, July.
    17. Esther Duflo & Michael Kremer & Jonathan Robinson, 2011. "Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya," American Economic Review, American Economic Association, vol. 101(6), pages 2350-2390, October.
    18. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 443-478.
    19. R. Glenn Hubbard, 1991. "Financial Markets and Financial Crises," NBER Books, National Bureau of Economic Research, Inc, number glen91-1.
    20. Stefano DellaVigna & Ulrike Malmendier, 2004. "Contract Design and Self-Control: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(2), pages 353-402.
    21. R. H. Strotz, 1955. "Myopia and Inconsistency in Dynamic Utility Maximization," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 23(3), pages 165-180.
    22. Leandro S. Carvalho & Stephan Meier & Stephanie W. Wang, 2016. "Poverty and Economic Decision-Making: Evidence from Changes in Financial Resources at Payday," American Economic Review, American Economic Association, vol. 106(2), pages 260-284, February.
    23. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1839-1872, September.
    24. Daniel Gottlieb, 2008. "Competition over Time‐Inconsistent Consumers," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(4), pages 673-684, August.
    25. Matthew Rabin, 2013. "Incorporating Limited Rationality into Economics," Journal of Economic Literature, American Economic Association, vol. 51(2), pages 528-543, June.
    26. Kreps, David M, 1979. "A Representation Theorem for "Preference for Flexibility"," Econometrica, Econometric Society, vol. 47(3), pages 565-577, May.
    27. Barth, James R. & Lin, Chen & Ma, Yue & Seade, Jesús & Song, Frank M., 2013. "Do bank regulation, supervision and monitoring enhance or impede bank efficiency?," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2879-2892.
    28. Amromin, Gene & Smith, Paul, 2003. "What Explains Early Withdrawals From Retirement Accounts? Evidence From a Panel of Taxpayers," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(3), pages 595-612, September.
    29. Baltensperger, Ernst, 1980. "Alternative approaches to the theory of the banking firm," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 1-37, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Laureti, Carolina & Szafarz, Ariane, 2023. "Banking regulation and costless commitment contracts for time-inconsistent agents," Economic Modelling, Elsevier, vol. 129(C).
    2. Carolina Laureti & Ariane Szafarz, 2012. "The Time-Inconsistency Factor: How Banks Adapt to their Mix of Savers," Working Papers CEB 12-035, ULB -- Universite Libre de Bruxelles.
    3. Carolina Laureti & Ariane Szafarz, 2014. "Having it Both Ways: A Theory of the Banking Firm with Time-Consistent and Time-Inconsistent Depositors," Working Papers CEB 14-011, ULB -- Universite Libre de Bruxelles.
    4. Anett John, 2020. "When Commitment Fails: Evidence from a Field Experiment," Management Science, INFORMS, vol. 66(2), pages 503-529, February.
    5. Ubfal, Diego, 2016. "How general are time preferences? Eliciting good-specific discount rates," Journal of Development Economics, Elsevier, vol. 118(C), pages 150-170.
    6. Anett John (née Hofmann), 2014. "When Commitment Fails - Evidence from a Regular Saver Product in the Philippines," STICERD - Economic Organisation and Public Policy Discussion Papers Series 055, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    7. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.
    8. Gharad Bryan & Dean Karlan & Scott Nelson, 2009. "Commitment Contracts," Working Papers 980, Economic Growth Center, Yale University.
    9. Anett John (née Hofmann), 2014. "When Commitment Fails - Evidence from a Regular Saver Product in the Philippines," STICERD - Economic Organisation and Public Policy Discussion Papers Series 55, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    10. Brigitte C. Madrian, 2014. "Applying Insights from Behavioral Economics to Policy Design," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 663-688, August.
    11. Andrej Woerner, 2021. "Overcoming Time Inconsistency with a Matched Bet: Theory and Evidence from Exercising," CESifo Working Paper Series 9503, CESifo.
    12. Christine L. Exley & Jeffrey K. Naecker, 2017. "Observability Increases the Demand for Commitment Devices," Management Science, INFORMS, vol. 63(10), pages 3262-3267, October.
    13. Liang Bai & Benjamin Handel & Edward Miguel & Gautam Rao, 2021. "Self-Control and Demand for Preventive Health: Evidence from Hypertension in India," The Review of Economics and Statistics, MIT Press, vol. 103(5), pages 835-856, December.
    14. Woerner, Andrej, 2023. "Overcoming Time Inconsistency with a Matched Bet: Theory and Evidence from Exercising," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277711, Verein für Socialpolitik / German Economic Association.
    15. Mariana Carrera & Heather Royer & Mark Stehr & Justin Sydnor & Dmitry Taubinsky, 2022. "Who Chooses Commitment? Evidence and Welfare Implications," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(3), pages 1205-1244.
    16. Koch, Alexander K. & Nafziger, Julia, 2009. "Commitment to Self-Rewards," IZA Discussion Papers 4049, Institute of Labor Economics (IZA).
    17. Uhr, Charline & Meyer, Steffen & Hackethal, Andreas, 2021. "Smoking hot portfolios? Trading behavior, investment biases, and self-control failure," Journal of Empirical Finance, Elsevier, vol. 63(C), pages 73-95.
    18. John Beshears & James J. Choi & Christopher Harris & David Laibson & Brigitte C. Madrian & Jung Sakong, 2015. "Self Control and Commitment: Can Decreasing the Liquidity of a Savings Account Increase Deposits?," NBER Working Papers 21474, National Bureau of Economic Research, Inc.
    19. Oliver Himmler & Robert Jäckle & Philipp Weinschenk, 2019. "Soft Commitments, Reminders, and Academic Performance," American Economic Journal: Applied Economics, American Economic Association, vol. 11(2), pages 114-142, April.
    20. Dean Karlan & Aishwarya Lakshmi Ratan & Jonathan Zinman, 2014. "Savings by and for the Poor: A Research Review and Agenda," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(1), pages 36-78, March.

    More about this item

    Keywords

    Behavioral economics; banking; savings account; liquidity premium; time inconsistency; commitment; quasi-hyperbolic discounting.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sol:wpaper:2013/260066. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Benoit Pauwels (email available below). General contact details of provider: https://edirc.repec.org/data/cebulbe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.