Working Paper: NBER ID: w16620
Authors: 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.
Keywords: demandable deposits; financial regulation; cognitive bias; overconfidence; deposit insurance
JEL Codes: D03; G21; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Overoptimism (D84) | Demandable Deposits (E41) |
| Overoptimism (D84) | Cognitive Bias of Overconfidence (G41) |
| Cognitive Bias of Overconfidence (G41) | Demandable Deposits (E41) |
| Regulatory Interventions (G18) | Depositor Welfare (D69) |