Date of Submission


Date of Award


Institute Name (Publisher)

Indian Statistical Institute

Document Type

Doctoral Thesis

Degree Name

Doctor of Philosophy

Subject Name

Quantitative Economics


Theoretical Statistics and Mathematics Unit (TSMU-Kolkata)


Gangopadhyay, Subhashis

Abstract (Summary of the Work)

Liquidity and Bank RunsThe policy of deposit insurance in the banking sector has succeeded in pre- venting bank runs but it has encouraged moral haxard (Kane, 1985 and 1989). This has increased the cost of capital. So the government and/or the central bank need to regulate (Flannery, 1982). In chapter 2, we ask the question - Is there an alternative to deposit insurance? What is the role of equity capital in this context? Is full insurance optimal?The seminal paper on bank runs by Diamond and Dybvig (1983) argues that a lack of deposit insurance leads to muitiple Nash equilibria, including a panic run as an equilibrium. In chapter 2, we use a general equilibrium model with both risk averse and risk neutral agents. Each group has some endowment. Within each group, there are two types of agents - type l nced to consume in the short term and type 2 need to consume in the long term. but agents do not know their type at the time they invest. We allow banks to sell equlity as well as deposits.We show that risk averse agents invest in deposits and the risk neutral agents invest in equity. Since the latter is irredeemable and depositors are senior claimants, there exists an amount of equity capital that is sufficient to ensure a run-free outcome as a Nash equilibrium. This allows risk averse depositors to be completely insured, even in the absence of deposit insure and e. If the amount of risk neutral equity capital is smaller, then also runs can be avoided but with less than full insurance for depositors.Diamond and Dybvig (1983) examined the role of a liquidity shock in the context of the problem of bank runs. In chapter 3, we look at the role of a liquidity shock in the context of the asset markets. In particular, we analyze liquidity shocks and the lemon problem, Liquidity and the Lemon Problem.Liquidity and the 'Lemon' ProblemWe construct a model in which an agent can invest either in her own project or in others projects, through a mutual fund. We term the former real asset and the latter is called financial asset. A real asset has two disadvantages. First, an agent can invest in one real asset which has a stochastic return. On the other hand, the return on financial asset is non-stochastic since it can be fully diversified. Second, in the case of a real asset, the owner has private information on the quality of the asset. This creates a problem for owners of real assets. Should an agent try to sell her real asset, the buyer is not sure whether it is being sold because it is a lemon, or because the seller has liquidity needs. On the other hand, in the case of financial assets. we assume that there is strict separation of ownership and information. The prospective buyer knows that the owner has no special information. Thus while the market for real assets is characterized by asymmetric information, financial assets are traded under symmetric information.


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