Behavioral Banking: A Theory of the Banking Firm with Time-Inconsistent Depositors

35 Pages Posted: 2 Oct 2012 Last revised: 26 Oct 2017

See all articles by Carolina Laureti

Carolina Laureti

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management; Université Libre de Bruxelles (ULB) - CERMi (Centre for European Research in Microfinance); Université de Mons, Warocqué Business School

Ariane Szafarz

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi

Date Written: October 23, 2017

Abstract

Time-consistent savers require compensation for holding savings accounts that are illiquid rather than liquid. In equilibrium, banks subject to reserve requirements for liquidity management are keen to offer that compensation. Yet the presence of time-inconsistent agents, who value illiquidity as a commitment device to discipline their future selves, reshuffles the deck. Our model determines the equilibrium liquidity premium––the interest spread between illiquid and liquid deposits––offered by a bank to a pool comprising known proportions of time-consistent and time-inconsistent savers, under the assumption that individual time consistency or inconsistency is private information. We characterize pooling and separating equilibria, and uncover two asymmetric externalities: time-inconsistent agents obtain a higher premium than they would request ex ante for holding illiquid accounts, while time-inconsistent agents make it harder for their time-consistent counterparts to get illiquid accounts. We also deliver insights on reserve requirements for banking regulation.

Keywords: Behavioral economics, banking, savings account, liquidity premium, time inconsistency, commitment, quasi-hyperbolic discounting

JEL Classification: G21, E21, D53, D91, G28

Suggested Citation

Laureti, Carolina and Szafarz, Ariane, Behavioral Banking: A Theory of the Banking Firm with Time-Inconsistent Depositors (October 23, 2017). Available at SSRN: https://ssrn.com/abstract=2155550 or http://dx.doi.org/10.2139/ssrn.2155550

Carolina Laureti (Contact Author)

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management ( email )

CP 132 Av FD Roosevelt 50
Brussels, Brussels 1050
Belgium

Université Libre de Bruxelles (ULB) - CERMi (Centre for European Research in Microfinance) ( email )

Campus du Solbosch
Avenue F.D. Roosevelt 21 - CP145/1
B-1050 Brussels
Belgium

Université de Mons, Warocqué Business School ( email )

20 place du Parc
Mons, B7000
Belgium

Ariane Szafarz

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi ( email )

50 Avenue Roosevelt
Brussels 1050
Belgium

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