Abstract: Since Diamond and Dybvig (1983), banks have been viewed as inherently fragile. We challenge this view in a general mechanism design framework, where we allow for flexibility in the design of banking mechanisms while maintaining limited commitment of the intermediary to future mechanisms. We find that the unique equilibrium outcome is efficient. Consequently, runs cannot occur in equilibrium. Our analysis points to the ultimate source of fragility: banks are fragile if they cannot collect and optimally respond to useful information during a run and not because they engage in maturity transformation. We link our banking mechanisms to recent technological advances surrounding 'smart contracts,' which enrich the practical possibilities for banking arrangements.
Discussant: Philip Dybvig, Washington University in St. Louis
Abstract: We propose a theory of payments that highlights a conflict between medium of exchange and store of value, two roles of money that are traditionally viewed as complementary. We posit that payments must involve the reciprocal transfer of a scarce reserve good, which holds value for other non-payment purposes. We show that agents make payments only when reserves are abundant enough and when the conflict between payment and non-payment functions is low. Otherwise, history-dependent equilibria arise in which an agent’s payment decision depends on the payment history of other agents within an equilibrium, giving rise to fragilities. The theory explains why payments frequently encounter delays and interruptions even if the reserve is always accepted as a payment means without its value being challenged. Improving payment technologies may not eliminate such fragility when reserves remain scarce and valuable for non-payment functions. The theory helps explain the evolution of money and payment systems, encompassing metallic payments before fiat money, modern bank payments, cross-border payments, and contemporary digital payment systems.
Abstract: We develop and estimate a dynamic oligopoly model of the passive mutual fund industry in which multiproduct asset management firms act as fund initiators and decide how many funds to launch in a given investment sector. Both mutual funds and management companies compete a la Cournot and take into account the demand for asset management services from a representative household investor. In the first part of the paper, we provide sufficient conditions for the existence and uniqueness of a steady-state equilibrium in which each management firm operates a constant number of funds and the equilibrium index price is constant. In the second part of the paper, we develop a nested fixed-point algorithm to estimate fund initiation costs separately for the five biggest management companies in the US passive equity industry by matching fund proliferation patterns observed in the data. We find that the top five companies are substantially more efficient and enjoy large scale economies relatively to the rest of the market. In a series of counterfactual exercises, we show that removing the largest management companies from the market would reduce investors' welfare by as much as 25%. Lastly, we characterize analytically the steady-state multiplier of household wealth on the equity index price in terms of the technology primitives of the industry. Our estimates imply that a 1% increase in household wealth increases the valuation of the equity index by 5.5%, consistent with other estimates in the literature.
