22 Pages Posted: 21 Nov 2008
We analyze the bank versus exchange problem in a Diamond Dybvig (1983) economy with exogenous transaction processing costs. We find that processing costs in the market enables the bank to overcome the side trade threat (Jacklin (1987)) and offer some desirable liquidity insurance. Moreover, in the bank equilibrium processing costs are proportional to consumption, while in the market economy early and late consumers incur equal costs. These two effects explain that for a given level of aggregate processing costs, the bank economy is superior. On the other hand, the number of transactions in the bank economy is larger. It is for this reason that if processing costs are proportional to transaction value, and independent of the mechanism used, the exchange economy is superior.
Suggested Citation: Suggested Citation
Bommel, Jos van, Risk Sharing in a World with Processing Costs: Trading Versus Banking. Financial Markets, Institutions & Instruments, Vol. 17, Issue 5, pp. 309-330, December 2008. Available at SSRN: https://ssrn.com/abstract=1304352 or http://dx.doi.org/10.1111/j.1468-0416.2008.00143.x
This is a Wiley-Blackwell Publishing paper. Wiley-Blackwell Publishing charges $38.00 .
File name: fmii.
If you wish to purchase the right to make copies of this paper for distribution to others, please select the quantity.