Working Paper: NBER ID: w1312
Authors: Joseph G. Haubrich; Robert G. King
Abstract: This paper studies the economic role of financial institutions in economies where agents' incomes are subject to privately observable, idiosyncratic random events. The information structure precludes conventional insurance arrangements. However, a financial institution -- perhaps best viewed as a savings bank -- can provide partial insurance by generating a time pattern of deposit returns that redistributes wealth from agents with high incomes to those with low incomes, resulting in a level of expected utility higher than that achievable in simple security markets. Insurance is incomplete because the bank faces a tradeoff between provision of insurance and maintenance of private incentives.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banking structure (G21) | expected utility (D81) |
| insurance provision (G52) | private incentives (M52) |