Introduction to the Special Issue on the Diamond-Dybvig Model

Information revelation in the Diamond-Dybvig banking model

Three recent papers, Green and Lin, Peck and Shell, and Andolfatto et. al., study optima in almost identical versions of the Diamond-Dybvig model. They di¤er about what agents know when they make early withdrawals. We view all three as special cases of a framework in which the planner chooses how much to reveal. It is shown that (i) the Peck-Shell conclusion, the best weakly implementable outco...

The role of independence in the Green-Lin Diamond-Dybvig model

Green and Lin study a version of the Diamond-Dybvig model with a finite number of agents, independent determination of each agent’s type (impatient or patient), and sequential service. For special preferences, they show that the ex ante first-best allocation is the unique equilibrium outcome of the model with private information about types. For general preferences, we show, via a simple argume...

Sequential decisions in the Diamond-Dybvig banking model

We study the Diamond-Dybvig model of financial intermediation (JPE, 1983) under the assumption that depositors have information about previous decisions. Depositors decide sequentially whether to withdraw their funds or continue holding them in the bank. If depositors observe the history of all previous decisions, we show that there are no bank runs in equilibrium independently of whether the r...

Ineffi cient Liquidity Provision

We prove that in competitive market economies with no insurance for idiosyncratic risks, agents will always overinvest in illiquid long term assets and underinvest in short term liquid assets. We take as our setting the seminal model of Diamond and Dybvig (1983), who first posed the question in a tractable model. We reach such a simple conclusion under mild conditions because we stick to the ba...

Another Attempt to Explain an Illiquid Banking System: The Diamond and Dybvig Model With Sequential Service Taken Seriously