410. A Hierarchical Agency Model of Deposit Insurance

Jonathan Carroll, Shino Takayama, School of Economics Discussion Paper No. 410, August 2010, School of Economics, The University of Queensland. Australia.

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Abstract

This paper develops a hierarchical agency model of deposit insurance. The main purpose is to undertake a game theoretic analysis of the consequences of deposit insurance schemes and their effects on monitoring incentives for banks. Using this simple framework, we analyze both risk- independent and risk-dependent premium schemes along with reserve requirement constraints. The results provide policymakers with not only a better understanding of the effects of deposit insurance on welfare and the problem of moral hazard, but also the policy implications implied in the design of de- posit insurance schemes. Our finding is consistent with the empirical research on depositor discipline.