Working Paper: NBER ID: w16752
Authors: Russell Cooper; Hubert Kempf
Abstract: This paper studies the provision of deposit insurance without commitment in an economy with heterogenous households. When households are identical, deposit insurance will be provided ex post to reap insurance gains. But the ex post provision of deposit insurance redistributes consumption when households differ in their claims on the banking system as well as in their tax obligations to finance the deposit insurance. Deposit insurance will not be provided ex post if it requires a (socially) undesirable redistribution of consumption which outweighs insurance gains.
Keywords: Deposit Insurance; Heterogeneous Households; Bank Runs; Redistribution; Financial Stability
JEL Codes: D84; E44; G21; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Deposit insurance gains outweigh redistribution costs (G28) | Deposit insurance will be provided ex post (G28) |
| Households are identical (D19) | Provision of deposit insurance leads to favorable outcome (G28) |
| Households differ in claims on banking system (D14) | Ex post provision of deposit insurance can lead to undesirable redistribution (G28) |
| Perceived undesirable redistribution (H23) | Deposit insurance will not be provided (G28) |
| Regulatory authority's ability to manage allocation of resources during a crisis (H12) | Effectiveness of deposit insurance in preventing bank runs (G28) |
| Structure of the tax system (H20) | Determination of whether deposit insurance will be provided ex post (G28) |
| More progressive tax systems (H29) | Alleviation of redistribution costs associated with deposit insurance (G28) |