Abstract
This paper develops a hierarchical agency model of deposit insurance. The main purpose of the analysis is to propose a micro-founded model of deposit insurance schemes and study their effects on the behavior of depositors and the monitoring problem for a bank. This paper also characterizes a risk-based premium in equilibrium, and conducts a comparative statics analysis of depositors’ optimal actions. The results supply the basic theoretical foundation for designing deposit insurance schemes. Our findings are consistent with the empirical research on depositor behavior.
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