This study considers how to implement an efficient allocation of a financial intermediation model, including liquidation costs. The main result shows that there is a mechanism such that, for any liquidation cost, an efficient allocation is implementable in strictly dominant strategies. There is no need for third-party assistance, such as deposit insurance. In addition, the mechanism is tolerant of a small, unexpected shock caused by premature withdrawals.
- bank runs
- Deposit contracts
- mechanism design
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)