Bank incentives, contract design and bank runs

We study the Diamond–Dybvig [Bank runs, deposit insurance, and liquidity, J. Polit. Econ. 91 (1983) 401–419] model as developed in Green and Lin [Implementing efficient allocations in a model of financial intermediation, J. Econ. Theory 109 (2003) 1–23] and Peck and Shell [Equilibrium bank runs, J. Polit. Econ. 111 (2003) 103–123]. We dispense with the notion of a bank as a coalition of depositors. Instead, our bank is a self-interested agent with a technological advantage in record-keeping. We examine the implications of the resulting agency problem for the design of bank contracts and the possibility of bank-run equilibria. For a special case, we discover that the agency problem may or may not simplify the qualitative structure of bank liabilities. We also find that the uniqueness result in Green and Lin [Implementing efficient allocations in a model of financial intermediation, J. Econ. Theory 109 (2003) 1–23] is robust to our form of agency, but that the non-uniqueness result in Peck and Shell [Equilibrium bank runs, J. Polit. Econ. 111 (2003) 103–123] is not.