Deposit Insurance Without Commitment: Wall St. Versus Main St
27 Pages Posted: 31 Jan 2011 Last revised: 3 Feb 2011
Date Written: January 2011
This paper studies the provision of deposit insurance without commitment in an economy with heterogenous households. When households are identical, deposit insurance will be provided ex post to reap insurance gains. But the ex post provision of deposit insurance redistributes consumption when households differ in their claims on the banking system as well as in their tax obligations to finance the deposit insurance. Deposit insurance will not be provided ex post if it requires a (socially) undesirable redistribution of consumption which outweighs insurance gains.
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