Moral hazard , bank runs and contagion
نویسندگان
چکیده
We study banking with ex ante moral hazard. Resolving the mis-alignment of the incentives between banks and depositors requires early liquidation with positive probability: e¢cient risk-sharing between depositors is no longer implementable. In a closed region with a single bank, we show that (i) with costless and perfect monitoring, contracts with bank runs o¤ the equilibrium path of play improve on contracts with transfers , (ii) when the bank's actions are non-contractible, equilibrium bank runs driven by incentives are linked to liquidity provision by banks. With multiple regions linked via an interbank market, with local moral hazard, we show that implementing second-best allocations requires both ex-ante trade in inter-bank markets and contagion after realization of liquidity shocks. JEL classi…cation numbers: G21, D82. ¤ An earlier version of this paper was titled "Liquidity, moral hazard and bank runs"
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