Abstract
This paper investigates the impact of variable-rate deposit insurance on the financial and real sectors of the economy and its role as an absorber of bankruptcy risk within these sectors. A variable-rate system raises the cost of funds to the real sector and increases probability of bankruptcy of the borrowing firms. When such bankruptcies occur, society experiences a dead weight loss. We argue that appropriate deposit insurance pricing must weigh the social costs connected with both financial firm failure and real-sector bankruptcy.
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