208-2011-L15

208-2011-L15 - Econ208 MarekKapicka Lecture15...

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Econ 208 Marek Kapicka Lecture 15 Financial Intermediation
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A Liquidity Problem 1. Autarchic Solution 2. Market Solution 3. Efficient Solution 4. Banking Solution
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4. Banking Solution A note on Information Structure
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4. Banking Solution
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4. Banking Solution Equilibrium without runs n Later on, we’ll see that banks are prone  to runs, but ignore it for now n The bank maximizes the expected utility n Subject to
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4. Banking Solution Equilibrium without runs n Maximize the expected utility n First order condition n Identical to the social planner’s problem n The good equilibrium is efficient!
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4. Banking Solution Equilibrium without runs
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4. Banking Solution Equilibrium without runs Equilibrium without  runs
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4. Banking Solution Equilibrium with runs
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4. Banking Solution Equilibrium with runs n Suppose that  everyone  decides to  withdraw in period 1 n Since  1. Not everyone in can be paid in period 1 2. Those who wait until period 2 will get  nothing n The bank will become  insolvent
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4. Banking Solution Equilibrium with runs n A payoff matrix: late consumer (rows) vs  every other late consumer (columns):
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208-2011-L15 - Econ208 MarekKapicka Lecture15...

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