Information revelation in the Diamond-Dybvig banking model

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...

Introduction to the Special Issue on the Diamond-Dybvig Model

T his special issue of the Economic Quarterly is dedicated to the 1983 model of bank runs developed by Douglas Diamond and Philip Dybvig.1 Their model has been a workhorse of banking research over the last 25 years and during the recent financial crisis it has been one that researchers and policymakers consistently turn to when interpreting financial market phenomena. The Diamond-Dybvig model h...

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

Implementing E cient Allocations in a Model of Financial Intermediation

In a nite-trader version of the Diamond-Dybvig (1983) model, the symmetric, ex-ante e cient allocation is implementable by a direct mechanism (i.e., each trader announces the type of his own ex-post preference) in which truthful revelation is the strictly dominant strategy for each trader. When the model is modi ed by formalizing the sequential-service constraint (cf. Wallace, 1988), the truth-...

Narrow Banking Meets the Diamond Dybvig Model

A version of the Diamond-Dybvig model of banking is used to evaluate the narrow banking proposal, the idea that banks should be required to back demand deposits entirely by safe short-term assets. It is shown that the mere existence of an amount of safe short-term assets outside the banking system that exceeds banking system liabilities does not make the proposal either innocuous or desirable. ...