Author： Freixas X. Rochet J-C.
Publisher： Academic Press
ISSN： 1090-9443
Source： Research in Economics, Vol.52, Iss.3, 1998-06, pp. : 217-232
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Abstract
This note elaborates on a recent contribution by Chan, Greenbaum and Thakor (1992) who argue that fairly priced deposit insurance is incompatible with free competition in the banking sector when adverse selection is present. We show that, under more general assumptions on the banks» operating costs, there exist incentive compatible mechanisms that are fairly priced. However, we compute the characteristics of the optimal premium schedule and show that it is not fairly priced: instead it entails subsidization of the less efficient banks by the most efficient ones. We also analyse the trade-off between short-run and long-run efficiency: cross-subsidies help relaxing incentive compatibility constraints but generate unfair competition. D82, G28, G21.
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