Banking: A Mechanism Design Approach

55 Pages Posted: 22 Oct 2009

See all articles by Fabrizio Mattesini

Fabrizio Mattesini

University of Rome Tor Vergata - Faculty of Economics

Cyril Monnet

University of Bern

Randall Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: October 15, 2009

Abstract

The authors study banking using the tools of mechanism design, without a priori assumptions about what banks are, who they are, or what they do. Given preferences, technologies, and certain frictions - including limited commitment and imperfect monitoring - they describe the set of incentive feasible allocations and interpret the outcomes in terms of institutions that resemble banks. The bankers in the authors' model endogenously accept deposits, and their liabilities help others in making payments. This activity is essential: if it were ruled out the set of feasible allocations would be inferior. The authors discuss how many and which agents play the role of bankers. For example, they show agents who are more connected to the market are better suited for this role since they have more to lose by reneging on obligations. The authors discuss some banking history and compare it with the predictions of their theory.

Suggested Citation

Mattesini, Fabrizio and Monnet, Cyril and Wright, Randall D., Banking: A Mechanism Design Approach (October 15, 2009). FRB of Philadelphia Working Paper No. 09-26, Available at SSRN: https://ssrn.com/abstract=1492250 or http://dx.doi.org/10.2139/ssrn.1492250

Fabrizio Mattesini (Contact Author)

University of Rome Tor Vergata - Faculty of Economics ( email )

Via Columbia n.2
Rome, rome 00100
Italy

Cyril Monnet

University of Bern ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
Switzerland

Randall D. Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-3860 (Phone)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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