An incentive problem in the dynamic theory of banking

Thadden, Ernst-Ludwig von

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Document Type: Working paper
Year of publication: 2000
The title of a journal, publication series: FAME Research Paper Series
Volume: 25
Place of publication: Geneva ; Zürich
Publishing house: International Center for Financial Asset Management and Engineering
Publication language: English
Institution: School of Law and Economics > Microeconomics and Finance (von Thadden (2004-)
Subject: 330 Economics
Abstract: This paper develops a continuous-time model of liquidity provision by banks, in which customers can deposit and withdraw their funds strategically. The strategic withdrawal option introduces an incentive-compatibility problem that turns the problem of designing deposit contracts into a non-standard, non-convex optimal control problem. The paper develops a solution method for this problem and shows that, in this more general frame-work, the insights obtained from the traditional banking models change considerably, up to the point of liquidity provision becoming impossible. The continuous-time framework allows to discuss the problem elegantly and may help to make this part of the banking literature more operational in the sense of modern asset pricing theory.

Dieser Datensatz wurde nicht während einer Tätigkeit an der Universität Mannheim veröffentlicht, dies ist eine Externe Publikation.

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